Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the documents incorporated by reference herein, contains, and from time to time our management may make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would," "annualized" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including the following: the geographic concentration of our business; current and future economic and market conditions inthe United States generally or inHawaii ,Guam and Saipan in particular, including, among other things, the rate of growth and the unemployment rate; the impact on our business, operations, financial condition, liquidity, results of operations, prospects and the trading price of our shares as a result of the COVID-19 pandemic; our dependence on the real estate markets in which we operate; concentrated exposures to certain asset classes and individual obligors; the effect of the current low interest rate environment or changes in interest rates on our business including our net interest income, net interest margin, the fair value of our investment securities, and our mortgage loan originations, mortgage servicing rights and mortgage loans held for sale; changes in the method pursuant to which LIBOR and other benchmark rates are determined or the discontinuance of LIBOR; the possibility of a deterioration in credit quality in our portfolio; the possibility we might underestimate the credit losses inherent in our loan and lease portfolio; our ability to maintain our Bank's reputation; the future value of the investment securities that we own, especially in light of the market volatility caused by the spread of COVID-19 and governmental and regulatory responses thereto; our ability to attract and retain customer deposits; our inability to receive dividends from our bank, pay dividends to our common stockholders and satisfy obligations as they become due; the effects of severe weather, geopolitical instability, including war, terrorist attacks, pandemics (including the ongoing COVID-19 pandemic) or other severe health emergencies and man-made and natural disasters; our ability to maintain consistent growth, earnings and profitability; our ability to attract and retain skilled employees or changes in our management personnel; possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, including quantitative easing, the lowering of interest rates and the imposition of tariffs that may harm sectors to which we are particularly exposed; our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business; the effectiveness of our risk management and internal disclosure controls and procedures; our ability to keep pace with technological changes; any failure or interruption of our information and communications systems; our ability to identify and address cybersecurity risks; the occurrence of fraudulent activity or effect of a material breach of, or disruption to, the security of any of our or our vendors' systems; the failure to properly use and protect our customer and employee information and data; the possibility of employee misconduct or mistakes; our ability to successfully develop and commercialize new or enhanced products and services; changes in the demand for our products and services; the effects of problems encountered by other financial institutions; our access to sources of liquidity and capital to address our liquidity needs; our use of the secondary mortgage market as a source of liquidity; risks associated with the sale of loans and with our use of appraisals in valuing and monitoring loans; the possibility that actual results may differ from estimates and forecasts; fluctuations in the fair value of our assets and liabilities and off-balance sheet exposures; the effects of the failure of any component of our business infrastructure provided by a third party; the potential for environmental liability; the risk of being subject to litigation and the outcome thereof; the impact of, and changes in, applicable laws, regulations and accounting standards and policies, including the enactment of the Tax Act (Public Law 115-97) onDecember 22, 2017 ; possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations; our likelihood of success in, and the impact of, litigation or regulatory actions; our ability to continue to pay dividends on our common stock or take other capital actions, which must comply with requirements under law or those imposed by our regulators and could 49
Table of Contents
impact our ability to return capital to stockholders; contingent liabilities and unexpected tax liabilities that may be applicable to us as a result of the Reorganization Transactions; and damage to our reputation from any of the factors described above.
The foregoing factors should not be considered an exhaustive list and should be read together with the risk factors and other cautionary statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and our Quarterly Reports on Form 10-Q for the quarters endedMarch 31, 2020 andJune 30, 2020 . If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law. Company Overview FHI is a bank holding company, which owns 100% of the outstanding common stock of FHB, its only direct, wholly owned subsidiary. FHB was founded in 1858 under the nameBishop & Company and was the first successful banking partnership in the Kingdom ofHawaii and the second oldest bank formed west of the Mississippi River. The Bank operates its business through three operating segments: Retail Banking, Commercial Banking andTreasury and Other.
References to "we," "our," "us," or the "Company" refer to the Parent and its subsidiary that are consolidated for financial reporting purposes.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company reflect the results of operations, financial position and cash flows of FHI and its wholly owned subsidiary, FHB. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods. The accompanying unaudited interim consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 and filed with theU.S. Securities and Exchange Commission (the "SEC").
Recent Developments regarding COVID-19 and the
Overview The Coronavirus Disease ("COVID-19") has spread throughout the world and has been declared a pandemic by theWorld Health Organization and continues to evolve. Several countries, including theU.S. , have been particularly hard hit by COVID-19. ThroughOctober 2020 , theU.S. has the highest number of confirmed cases and deaths reported as a result of COVID-19 in the world. Despite efforts to control the spread of COVID-19, theU.S. continues to experience a significant number of confirmed COVID-19 cases. The global andU.S. economies have entered into a pandemic-driven recession. The future impact of COVID-19 on the global andU.S. economies, and the timing and robustness of any related recovery, continues to remain uncertain. 50 Table of Contents
As a result of the COVID-19 outbreak and related response, theU.S. economy has deteriorated but is slowly improving. InMarch 2020 , in many parts of theU.S. , employees began working from home and businesses deemed nonessential were temporarily closed. Workers in the retail, restaurant, travel and leisure industries were particularly hard hit by layoffs as large parts of theU.S. went into lockdown. According to theFederal Reserve's May 2020 Beige Book, declines in consumer spending were "especially severe in the leisure and hospitality sector, with very little activity at travel and tourism businesses." The national seasonally adjusted unemployment rate increased from 4.4% inMarch 2020 to 14.7% inApril 2020 . InMay 2020 , state-by-state decisions began to be made on the pace and extent of reopening local businesses. The phased reopening of theU.S. economy brought the national seasonally adjusted unemployment rate down to 7.9% inSeptember 2020 . TheAugust 2020 Beige Book reports "some improvements in tourism and retail sectors" but that "total spending was still below pre-pandemic levels." New claims for unemployment insurance decreased to 800,000 per week in early October from above one million per week throughJuly 2020 . TheU.S. real gross domestic product decreased at an annual rate by 5.0% in the first quarter of 2020, followed by a 31.4% decrease in the second quarter.
Hawaii Economy
Hawaii's economy continues to be significantly impacted by COVID-19 and the responses to it.Hawaii's economy began to suffer inFebruary 2020 with flight cancellations toHawaii due to the global COVID-19 pandemic. OnMarch 5, 2020 , the Governor of theState of Hawaii issued an emergency proclamation declaring a state of emergency inHawaii . OnMarch 21, 2020 , the Governor of theState of Hawaii issued a supplementary emergency proclamation ordering all individuals, both residents and visitors, arriving or returning to theState of Hawaii to a mandatory 14-day self-quarantine. The mandate, which was the first such action in the nation, essentially brought theHawaii tourism industry to a halt. Subsequently, onMarch 23, 2020 , the Governor of theState of Hawaii issued a third supplemental emergency proclamation that required all residents to stay at home, with the exception of certain essential activities associated with identified essential businesses and services. As a result of these measures, thus far, the spread of COVID-19 has been relatively well controlled inHawaii . InMay 2020 , the Governor of theState of Hawaii issued a seventh and eighth supplemental emergency proclamation which effectively ended stay-at-home orders, allowed for the reopening of certain businesses deemed to be of lower risk for COVID-19 transmissions, and outlined a four-phase reopening strategy forHawaii's economy and allowing for a gradual reopening of medium-risk businesses inJune 2020 . Subsequently, the Governor issued a ninth, tenth, eleventh, and twelfth supplemental emergency proclamation onJune 10 ,July 17 ,August 7 , andAugust 20, 2020 , respectively, enforcing the 14-day self-quarantine mandate for interisland travel and travel toHawaii state. TheHonolulu County Mayor also issued Emergency Order 2020-25 and 2020-26, essentially placing the island ofOahu under a second lockdown fromAugust 27 through September 23, 2020 . The Governor of theState of Hawaii issued his thirteenth supplemental emergency proclamation onSeptember 23, 2020 , that allows passengers from theU.S. mainland with an approved negative COVID-19 test within 72 hours prior to arrival in theState of Hawaii to bypass the state's mandatory 14-day self-quarantine requirement, effectiveOctober 15 . For an economy that is heavily dependent on tourism, the combination of various response measures to the COVID-19 pandemic, including the stay-at-home orders for local residents and the mandatory 14-day self-quarantine for visitors resulted in an unprecedented increase inHawaii unemployment. The statewide seasonally adjusted unemployment rate was 15.1% inSeptember 2020 compared to 2.7% inSeptember 2019 , according to the State ofHawaii Department of Labor and Industrial Relations , while the national seasonally adjusted unemployment rate was 7.9% inSeptember 2020 compared to 3.5% inSeptember 2019 . Visitor arrivals for the first nine months of 2020 decreased by 72% compared to the same period in 2019, according to theHawaii Tourism Authority . Statistics on visitor spending were not available for 2020 due to insufficient data. While we may see a gradual improvement in unemployment as local businesses and theHawaii tourism industry slowly reopen in the fourth quarter of 2020, the timing and extent of the return of air travel and the recovery of theHawaii tourism industry is highly uncertain and beyond our control. 51 Table of Contents
Although the volume of home sales onOahu has decreased year-over-year due to stay-at-home orders that were in place earlier in the year, prices have remained stable. For the nine months endedSeptember 30, 2020 , the volume of single-family home sales decreased by 1.4%, while condominium sales decreased by 18.9% compared to the same period in 2019, according to theHonolulu Board of Realtors . The median price of single-family home sales and condominium sales onOahu was$811,000 and$430,000 , respectively, or an increase of 3.3% and 1.2%, respectively, for the nine months endedSeptember 30, 2020 as compared to the same period in 2019. As ofSeptember 30, 2020 , months of inventory of single-family homes and condominiums onOahu remained low at approximately 1.9 and 4 months, respectively. Lastly, state general excise and use tax revenues decreased by 11% for the first seven months of 2020 as compared to the same period in 2019, according to the HawaiiDepartment of Business, Economic Development & Tourism . We expect tax revenues for the state to continue to be significantly lower when reported for the remainder of 2020.
Legislative and Regulatory Developments
Recent actions taken by the federal government and theFederal Reserve and other bank regulatory agencies to partially mitigate the economic effects of COVID-19 and related containment measures will also have an impact on our financial position and results of operations. These actions are further discussed below. In response to market conditions resulting from the COVID-19 pandemic, theFederal Reserve has taken a number of proactive measures, including cutting its target for the federal funds rate by a total of 1.50%, bringing it down to a range of 0.00% to 0.25%. InSeptember 2020 , theFederal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels until such time that labor market conditions have reached levels consistent with theFederal Open Market Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. This timeframe is currently expected to last through 2023.
The
? establishing a temporary repurchase agreement facility for foreign and
international monetary authorities;
? committing to quantitative easing through large-scale asset-purchase programs;
? lowering the rate charged on its discount window and extending the length of
the loans offered;
? increasing the frequency of engagement with currency swap lines with foreign
central banks;
? expanding the collateral accepted by its Term Asset-Backed Securities Loan
Facility; and
introducing a number of additional facilities, such as the Main Street Lending
? Facility, which is designed to enhance support for small and mid-sized
businesses that were in good financial standing before the crisis.
TheU.S. government has also enacted certain fiscal stimulus measures in several phases to counteract the economic disruption caused by COVID-19. The CARES Act, enacted onMarch 27, 2020 , is an approximately$2 trillion emergency economic stimulus package in response to the COVID-19 outbreak. Among other provisions, the CARES Act (i) authorized the Secretary of theTreasury to make loans, loan guarantees and other investments, up to$500 billion , for assistance to eligible businesses, States and municipalities with limited, targeted relief for passenger air carriers, cargo air carriers, and businesses critical to maintaining national security, (ii) created a$670 billion loan program (the "Paycheck Protection Program" or the "PPP") for fully guaranteed loans (which may then be forgiven) to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments (program dollar amount includes amount approved under the original program inMarch 2020 and a second tranche which was approved inApril 2020 ), (iii) provides certain credits against the 2020 personal income tax for eligible individuals and their dependents, (iv) expanded eligibility for unemployment insurance and provides eligible recipients with an additional$600 per week on top of the unemployment amount determined by each State and (v) set a 60-day foreclosure moratorium beginning onMarch 18, 2020 for federally backed mortgage loans (theFederal Housing Administration has subsequently announced a second extension of the foreclosure and eviction moratorium throughAugust 31, 2020 ). 52 Table of Contents The Paycheck Protection Program Flexibility Act of 2020 (the "PPPF Act") was enacted onJune 5, 2020 and modified the PPP as follows: (i) established a minimum maturity of five years for all loans made after the enactment of the PPPF Act and permits an extension of the maturity of existing loans to five years if the borrower and lender agree; (ii) extended the "covered period" of the CARES Act fromJune 30, 2020 , toDecember 31, 2020 ; (iii) extended the eight-week "covered period" for expenditures that qualify for forgiveness to the earlier of 24 weeks following loan origination andDecember 31, 2020 ; (iv) extended the deferral period for payment of principal, interest and fees to the date on which the forgiveness amount is remitted to the lender by theU.S. Small Business Administration ("SBA"); (v) required the borrower to use at least 60% (down from 75%) of the proceeds of the loan for payroll costs, and up to 40% (up from 25%), for other permitted purposes, as a condition to obtaining forgiveness of the loan; (vi) delayed fromJune 30, 2020 toDecember 31, 2020 , the date by which employees must be rehired to avoid a reduction in the amount of forgiveness of a loan, and creates a "rehiring safe harbor" that allows businesses to remain eligible for loan forgiveness if they make a good faith attempt to rehire employees or hire similarly qualified employees, but are unable to do so, or are able to document an inability to return to pre-COVID-19 levels of business activity due to compliance with social distancing measures; and (vii) allowed borrowers to receive both loan forgiveness under the PPP and the payroll tax deferral permitted under the CARES Act, rather than having to choose the more advantageous option. InJuly 2020 , the CARES Act was amended to extend, throughAugust 8, 2020 , the SBA's authority to make commitments under the PPP. The SBA's existing authority had previously expired onJune 30, 2020 . InAugust 2020 ,President Trump signed four executive actions to provide additional COVID-19 relief. These executive orders seek to (i) allocate$44 billion from theDisaster Relief Fund to provide additional unemployment benefits through the authorization of theLost Wages Assistance Program , which provides for a$400 -per-week payment to those currently receiving more than$100 a week in unemployment benefits due to disruptions caused by COVID-19, (ii) extend the moratorium on payments and interest accrual on student loans held by the government until the end of 2020, (iii) defer collections of certain employee social security payroll taxes, and (iv) identify options to help renters and homeowners avoid evictions and foreclosures.
We are continuing to monitor the potential development of additional legislation
and further actions taken by the
TheState of Hawaii is expected to receive at least$1.25 billion in federal aid from the CARES Act. We expect that the majority of this federal aid will be used to help fund state and county government response efforts to COVID-19. Additional federal funding is expected to provide for unemployment assistance, direct cash payments toHawaii residents and funding to support local schools and colleges. Impact to our Operations As noted above, onMarch 23, 2020 , the Governor of theState of Hawaii issued a third supplemental emergency proclamation that ordered all residents to stay at home, with the exception of certain essential activities associated with identified essential businesses and services. A stay-at-home order was in place untilMay 31, 2020 , and then reinstated fromAugust 27, 2020 throughSeptember 23, 2020 . While the Bank is an essential business inHawaii , we saw a significant decrease in customer traffic in our branches in recent periods. As a result, we strategically closed 26 of our branch locations on a temporary basis and have decided to close four of them permanently byNovember 2020 . From June to earlyNovember 2020 , we reopened 18 of the temporarily closed branch locations in connection with the reopening of local businesses. The temporary (or in certain cases, permanent) closures of bank branches and the safety precautions implemented at re-opened branches could result in consumers becoming more comfortable with technology and devaluing face-to-face interaction. Our business is relationship driven and such changes could necessitate changes to our business practices to accommodate changing consumer behaviors. We continue to provide service to all customers and operate our businesses on all islands ofHawaii ,Guam and Saipan. Additionally, as part of our contingency plans, we have established a redundant operations center for our administrative operations, and many of our employees are working remotely. 53 Table of Contents
Impact on our Financial Position and Results of Operations
Due to the widespread impact that COVID-19 is having onHawaii's economy, we expect that adverse economic conditions will continue. While its effects continue to materialize, the COVID-19 pandemic has resulted in a significant decrease in commercial activity throughout theState of Hawaii and nationally. This decrease in commercial activity has caused and may continue to cause our customers (including affected businesses and individuals), vendors and counterparties to be unable to meet existing payment or other obligations to us. AsHawaii's economy begins to reopen, we expect that local consumption of goods and services will begin to resume over an extended period of time. Additionally, the timing and extent of the return of air travel and the recovery of theHawaii tourism industry is highly uncertain and is dependent upon, among other things, the number of cases declining around the globe, inthe United States and, in particular, inHawaii , visitor receptiveness toHawaii's new pre-travel COVID-19 testing requirements, an extended period in which there is no subsequent "wave" of infections and the widespread availability of a vaccine, treatment or testing, tracking and tracing capabilities. During this time of uncertainty, we remain committed to servicing our customers, caring for our employees and supporting the community. The economic pressures and uncertainties arising from the COVID-19 pandemic has resulted in and may continue to result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services we offer. For example, certain industries may take longer to recover (particularly those that rely on travel or large gatherings) as consumers may be hesitant to travel or return to full social interaction. We lend to customers operating in such industries including tourism, hotels/lodging, restaurants, entertainment and commercial real estate, among others. We will continue to closely monitor the impact that COVID-19 and the recession inHawaii has on our customers and will adjust the means by which we assist our customers during this period of financial hardship. We are working with our customers impacted by COVID-19 through offering payment deferrals and forbearance on certain loan products. We are continuing to care for our employees by enabling more of our employees to work from home, and for those employeeswho are deemed essential and unable to work from home, we continue to emphasize the importance of practicing social distancing and good hygiene practices in the workplace. We also launched an initiative to support local restaurants and, through our foundation, to donate up to$1 million to support non-profit organizations with food supply and health and human service programs for those impacted by COVID-19. We have also partnered with theHawaii Community Foundation by contributing$1 million , through our foundation, to establish the$2 million Stronger Together Hawai'iScholarship Fund , which provides scholarship opportunities to public high school seniorswho graduated amidst the pandemic. Unlike traditional scholarships that are limited to tuition and college materials, students awarded with the scholarship can use the funds in a variety of ways, with the intent to help students overcome barriers to their education caused by COVID-19. The shut-down ofHawaii's tourism industry, stay-at-home measures, the recession inHawaii and record low interest rates will continue to have a negative impact on our financial position and results of operations. A continued decrease in interest rates, or sustained period of interest rates, would be expected to reduce our net interest margin, as, currently, our interest rate profile is such that we project net interest income will benefit from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the case of lower interest rates, our assets would reprice downward and to a greater degree than our liabilities. Our net interest margin also may be reduced as a result of our participation in the PPP, with loans made thereunder that are not forgiven carrying an interest rate of 1%. Our credit risk profile has also been, and we expect that it will continue to be, adversely impacted during this period of financial hardship for our customers. We also expect that we will see temporary decreases in non-interest income, partially driven by certain measures we have taken to assist customers during the COVID-19 pandemic.
Moreover, we have seen increased draws by some of our customers on lines of credit as they have sought to improve their liquidity positions. While we expect a significant portion of loans made by the Bank through our participation in the PPP to be forgiven, we expect that a sizeable portion of such loans will remain on our balance sheet for up to two years. As a result, we expect to see higher loan volumes and reduced capital levels as a result of the COVID-19 pandemic. In light of volatility in the capital markets and economic disruptions, we continue to carefully monitor our capital and liquidity positions. As ofSeptember 30, 2020 , the Company was "well-capitalized" and met all applicable regulatory capital requirements, including a Common Equity Tier 1 capital ratio of 12.22%, compared to the minimum requirement of 4.50%. We continue to anticipate that we will have sufficient capital levels to meet all of these requirements. Additionally, we continue to access our routine short-term funding sources, such as borrowings and repurchase agreements, and to assess longer-term funding sources. For additional discussions regarding our capital and liquidity positions and related risks, refer to the sections titled "Liquidity" and "Capital" in this MD&A. 54 Table of Contents Selected Financial Data Our financial highlights for the periods indicated are presented in Table 1: Financial Highlights Table 1 For the Three Months Ended For the Nine Months EndedSeptember 30 ,September 30 ,
(dollars in thousands, except per share data) 2020 2019
2020 2019 Income Statement Data: Interest income$ 141,927 $ 170,181 $ 441,078 $ 516,560 Interest expense 7,925 27,100 40,571 82,777 Net interest income 134,002 143,081 400,507 433,783 Provision for credit losses 5,072 - 101,718 9,550 Net interest income after provision for credit losses 128,930 143,081 298,789 424,233 Noninterest income 48,898 49,980 143,782 145,825 Noninterest expense 91,629 93,466 279,545 279,379 Income before provision for income taxes 86,199 99,595 163,026 290,679 Provision for income taxes 21,098 25,396 39,011 74,123 Net income$ 65,101 $ 74,199 $ 124,015 $ 216,556 Basic earnings per share$ 0.50 $ 0.56 $ 0.95 $ 1.62 Diluted earnings per share$ 0.50 $ 0.56 $ 0.95 $ 1.61 Basic weighted-average outstanding shares 129,896,054 132,583,902 129,882,878 133,957,192 Diluted weighted-average outstanding shares 130,085,534 132,877,769 130,129,690 134,231,762 Dividends declared per share$ 0.26 $ 0.26 $ 0.78 $ 0.78 Dividend payout ratio 52.00 % 46.43 % 82.11 % 48.45 % Supplemental Income Statement Data (non-GAAP)(1): Core net interest income$ 134,002 $ 143,081 $ 400,507 $ 433,783 Core noninterest income 48,874 49,980 143,884 148,417 Core noninterest expense 91,629 91,222 279,545 276,613 Core net income 65,083 75,871 124,090 220,535
Core basic earnings per share 0.50 0.57 0.96 1.65 Core diluted earnings per share 0.50 0.57 0.95 1.64 Other Financial Information / Performance Ratios:(2) Net interest margin 2.70 % 3.19 % 2.79 % 3.22 % Core net interest margin (non-GAAP)(1),(3) 2.70 % 3.19 % 2.79 % 3.22 % Efficiency ratio 50.01 % 48.41 % 51.32 % 48.20 % Core efficiency ratio (non-GAAP)(1),(4) 50.02 % 47.25 % 51.31 % 47.51 % Return on average total assets 1.16 % 1.45 % 0.76 % 1.42 % Core return on average total assets (non-GAAP)(1),(5) 1.16 % 1.48 % 0.76 % 1.44 % Return on average tangible assets (non-GAAP)(11) 1.21 % 1.52 % 0.80 % 1.49 % Core return on average tangible assets (non-GAAP)(1),(6) 1.21 % 1.56 % 0.80 % 1.52 % Return on average total stockholders' equity 9.58 % 11.12 % 6.16 % 11.13 % Core return on average total stockholders' equity (non-GAAP)(1),(7) 9.57 % 11.37 % 6.17 % 11.34 % Return on average tangible stockholders' equity (non-GAAP)(11) 15.16 % 17.81 % 9.79 % 18.04 % Core return on average tangible stockholders' equity (non-GAAP)(1),(8) 15.15 % 18.21 % 9.80 % 18.37 % Noninterest expense to average assets 1.63 % 1.82 % 1.72 % 1.83 % Core noninterest expense to average assets (non-GAAP)(1),(9) 1.63 % 1.78 % 1.72 % 1.81 % 55 Table of Contents September 30, December 31, 2020 2019 Balance Sheet Data: Cash and cash equivalents$ 816,329 $ 694,017 Investment securities 5,692,883 4,075,644 Loans and leases 13,499,969 13,211,650
Allowance for credit losses for loans and leases 195,876
130,530 Goodwill 995,492 995,492 Total assets 22,310,701 20,166,734 Total deposits 18,897,762 16,444,994 Short-term borrowings - 400,000 Long-term borrowings 200,010 200,019 Total liabilities 19,576,767 17,526,476
Total stockholders' equity 2,733,934
2,640,258
Book value per share $ 21.04 $ 20.32 Tangible book value per share (non-GAAP)(11) $ 13.38
$ 12.66
Asset Quality Ratios: Non-accrual loans and leases / total loans and leases 0.13 % 0.04 % Allowance for credit losses for loans and leases / total loans and leases 1.45 % 0.99 % Net charge-offs / average total loans and leases(10) 0.29
% 0.19 % September 30, December 31, Capital Ratios: 2020 2019
Common Equity Tier 1 Capital Ratio 12.22
% 11.88 % Tier 1 Capital Ratio 12.22 % 11.88 % Total Capital Ratio 13.47 % 12.81 % Tier 1 Leverage Ratio 7.91 % 8.79 %
Total stockholders' equity to total assets 12.25 % 13.09 % Tangible stockholders' equity to tangible assets (non-GAAP)(11) 8.16 % 8.58 %
(1) We present net interest income, noninterest income, noninterest expense, net
income, basic earnings per share, diluted earnings per share and the related
ratios described below, on an adjusted, or "core," basis, each a non-GAAP
financial measure. These core measures exclude from the corresponding GAAP
measure the impact of certain items that we do not believe are representative
of our financial results. We believe that the presentation of these non-GAAP
measures helps identify underlying trends in our business from period to
period that could otherwise be distorted by the effect of certain expenses,
gains and other items included in our operating results. We believe that
these core measures provide useful information about our operating results
and enhance the overall understanding of our past performance and future
performance. Investors should consider our performance and financial
condition as reported under GAAP and all other relevant information when
assessing our performance or financial condition. Non-GAAP measures have
limitations as analytical tools and investors should not consider them in isolation or as a substitute for analysis of our financial results or financial condition as reported under GAAP. 56 Table of Contents
The following table provides a reconciliation of net interest income, noninterest income, noninterest expense and net income to their "core" non-GAAP financial measures:
GAAP to Non-GAAP Reconciliation
Table 2 For the Three Months Ended For the Nine Months EndedSeptember 30 ,September 30 ,
(dollars in thousands, except per share data) 2020 2019 2020 2019 Net interest income$ 134,002 $ 143,081 $ 400,507 $ 433,783 Core net interest income (non-GAAP)$ 134,002 $
143,081
Noninterest income$ 48,898 $ 49,980 $ 143,782 $ 145,825 (Gains) losses on sale of securities (24) - 102 2,592 Core noninterest income (non-GAAP)$ 48,874 $ 49,980 $ 143,884 $ 148,417 Noninterest expense$ 91,629 $ 93,466 $ 279,545 $ 279,379 One-time items(a) - (2,244) - (2,766) Core noninterest expense (non-GAAP)$ 91,629 $
91,222
Net income$ 65,101 $ 74,199 $ 124,015 $ 216,556 (Gains) losses on sale of securities (24) - 102 2,592 One-time noninterest expense items(a) -
2,244 - 2,766 Tax adjustments(b) 6 (572) (27) (1,379) Total core adjustments (18) 1,672 75 3,979 Core net income (non-GAAP)$ 65,083 $
75,871
Basic earnings per share $ 0.50 $ 0.56 $ 0.95 $ 1.62 Diluted earnings per share $ 0.50 $ 0.56 $ 0.95 $ 1.61 Efficiency ratio 50.01 % 48.41 % 51.32 % 48.20 % Core basic earnings per share (non-GAAP) $ 0.50 $ 0.57 $ 0.96 $ 1.65 Core diluted earnings per share (non-GAAP) $ 0.50 $ 0.57 $ 0.95 $ 1.64 Core efficiency ratio (non-GAAP) 50.02 % 47.25 % 51.31 % 47.51 %
(a) One-time items for the three and nine months ended
included costs related to a nonrecurring payment for a former executive of
the Company pursuant to the Bank's Executive Change-in-Control Retention
Plan, nonrecurring offering costs and the loss on our funding swap as a result of a 2019 decrease in the conversion rate of our Visa Class B restricted shares sold in 2016.
(b) Represents the adjustments to net income, tax effected at the Company's
effective tax rate for the respective period.
(2) Except for the efficiency ratio and the core efficiency ratio, amounts are
annualized for the three and nine months ended
(3) Core net interest margin is a non-GAAP financial measure. We compute our core
net interest margin as the ratio of core net interest income to average
earning assets. For a reconciliation to the most directly comparable GAAP
financial measure for core net interest income, see Table 2, GAAP to Non-GAAP
Reconciliation.
(4) Core efficiency ratio is a non-GAAP financial measure. We compute our core
efficiency ratio as the ratio of core noninterest expense to the sum of core
net interest income and core noninterest income. For a reconciliation to the
most directly comparable GAAP financial measure for core noninterest expense,
core net interest income and core noninterest income, see Table 2, GAAP to
Non-GAAP Reconciliation.
(5) Core return on average total assets is a non-GAAP financial measure. We
compute our core return on average total assets as the ratio of core net
income to average total assets. For a reconciliation to the most directly
comparable GAAP financial measure for core net income, see Table 2, GAAP to
Non-GAAP Reconciliation.
(6) Core return on average tangible assets is a non-GAAP financial measure. We
compute our core return on average tangible assets as the ratio of core net
income to average tangible assets, which is calculated by subtracting (and
thereby effectively excluding) amounts related to the effect of goodwill from
our average total assets. For a reconciliation to the most directly
comparable GAAP financial measure for core net income, see Table 2, GAAP to
Non-GAAP Reconciliation. 57 Table of Contents
(7) Core return on average total stockholders' equity is a non-GAAP financial
measure. We compute our core return on average total stockholders' equity as
the ratio of core net income to average total stockholders' equity. For a
reconciliation to the most directly comparable GAAP financial measure for
core net income, see Table 2, GAAP to Non-GAAP Reconciliation.
(8) Core return on average tangible stockholders' equity is a non-GAAP financial
measure. We compute our core return on average tangible stockholders' equity
as the ratio of core net income to average tangible stockholders' equity,
which is calculated by subtracting (and thereby effectively excluding)
amounts related to the effect of goodwill from our average total
stockholders' equity. For a reconciliation to the most directly comparable
GAAP financial measure for core net income, see Table 2, GAAP to Non-GAAP
Reconciliation.
(9) Core noninterest expense to average assets is a non-GAAP financial measure.
We compute our core noninterest expense to average assets as the ratio of
core noninterest expense to average total assets. For a reconciliation to the
most directly comparable GAAP financial measure for core noninterest expense,
see Table 2, GAAP to Non-GAAP Reconciliation.
(10) Net charge-offs / average total loans and leases is annualized for the nine
months endedSeptember 30, 2020 .
(11) Return on average tangible assets, return on average tangible stockholders'
equity, tangible book value per share and tangible stockholders' equity to
tangible assets are non-GAAP financial measures. We compute our return on average tangible assets as the ratio of net income to average tangible assets. We compute our return on average tangible stockholders' equity as
the ratio of net income to average tangible stockholders' equity. We compute
our tangible book value per share as the ratio of tangible stockholders'
equity to outstanding shares. We compute our tangible stockholders' equity
to tangible assets as the ratio of tangible stockholders' equity to tangible
assets. We believe that these financial measures are useful for investors,
regulators, management and others to evaluate financial performance and
capital adequacy relative to other financial institutions. Although these
non-GAAP financial measures are frequently used by shareholders in the
evaluation of a company, they have limitations as analytical tools and
should not be considered in isolation or as a substitute for analyses of
results as reported under GAAP.
The following table provides a reconciliation of these non-GAAP financial measures with their most closely related GAAP measures for the periods indicated:
GAAP to Non-GAAP Reconciliation
Table 3 For the Three Months Ended For the Nine Months EndedSeptember 30 ,September 30 ,
(dollars in thousands, except per share data) 2020 2019 2020 2019 Income Statement Data: Noninterest expense$ 91,629 $ 93,466 $ 279,545 $ 279,379 Core noninterest expense$ 91,629
$ 91,222 $ 279,545 $ 276,613 Net income$ 65,101 $ 74,199 $ 124,015 $ 216,556 Core net income$ 65,083 $ 75,871 $ 124,090 $ 220,535
Average total stockholders' equity$ 2,704,129 $ 2,648,428 $ 2,687,632 $ 2,600,259 Less: average goodwill 995,492 995,492 995,492 995,492 Average tangible stockholders' equity$ 1,708,637
Average total assets$ 22,341,485 $ 20,332,457 $ 21,667,948 $ 20,405,261 Less: average goodwill 995,492 995,492 995,492 995,492 Average tangible assets$ 21,345,993
Return on average total stockholders' equity(a) 9.58 % 11.12 % 6.16 % 11.13 % Core return on average total stockholders' equity (non-GAAP)(a) 9.57 % 11.37 % 6.17 % 11.34 % Return on average tangible stockholders' equity (non-GAAP)(a) 15.16 % 17.81 % 9.79 % 18.04 % Core return on average tangible stockholders' equity (non-GAAP)(a) 15.15 % 18.21 % 9.80 % 18.37 % Return on average total assets(a) 1.16 % 1.45 % 0.76 % 1.42 % Core return on average total assets (non-GAAP)(a) 1.16 % 1.48 % 0.76 % 1.44 % Return on average tangible assets (non-GAAP)(a) 1.21 % 1.52 % 0.80 % 1.49 % Core return on average tangible assets (non-GAAP)(a) 1.21 % 1.56 % 0.80 % 1.52 % Noninterest expense to average assets(a) 1.63 % 1.82 % 1.72 % 1.83 % Core noninterest expense to average assets (non-GAAP)(a) 1.63 % 1.78 % 1.72 % 1.81 % 58 Table of Contents As of As of September 30, December 31, 2020 2019 Balance Sheet Data: Total stockholders' equity$ 2,733,934 $ 2,640,258 Less: goodwill 995,492 995,492 Tangible stockholders' equity$ 1,738,442 $ 1,644,766 Total assets$ 22,310,701 $ 20,166,734 Less: goodwill 995,492 995,492 Tangible assets$ 21,315,209 $ 19,171,242 Shares outstanding
129,911,789 129,928,479
Total stockholders' equity to total assets 12.25 % 13.09 % Tangible stockholders' equity to tangible assets (non-GAAP) 8.16 % 8.58 % Book value per share $ 21.04$ 20.32 Tangible book value per share (non-GAAP) $
13.38
(a) Annualized for the three and nine months ended
Financial Highlights Net income was$65.1 million for the three months endedSeptember 30, 2020 , a decrease of$9.1 million or 12% as compared to the same period in 2019. Basic and diluted earnings per share were both$0.50 per share for the three months endedSeptember 30, 2020 , a decrease of$0.06 per share or 11% as compared to the same period in 2019. The decrease in net income was primarily due to a$9.1 million decrease in net interest income, a$5.1 million increase in the provision for credit losses (the "Provision") and a$1.1 million decrease in noninterest income, partially offset by a$4.3 million decrease in the provision for income taxes and a$1.8 million decrease in noninterest expense for the three months endedSeptember 30, 2020 . Our return on average total assets was 1.16% for the three months endedSeptember 30, 2020 , a decrease of 29 basis points from the same period in 2019, and our return on average total stockholders' equity was 9.58% for the three months endedSeptember 30, 2020 , a decrease of 154 basis points from the same period in 2019. Our return on average tangible assets was 1.21% for the three months endedSeptember 30, 2020 , a decrease of 31 basis points from the same period in 2019, and our return on average tangible stockholders' equity was 15.16% for the three months endedSeptember 30, 2020 , down from 17.81% for the same period in 2019. We continued to prudently manage our expenses, as our efficiency ratio was 50.01% for the three months endedSeptember 30, 2020 compared to 48.41% for the same period in 2019.
Our results for the three months ended
Net interest income was
period in 2019. Our net interest margin was 2.70% for the three months ended
? period in 2019. The decrease in net interest income was primarily due to lower
yields in all loan categories and lower yields in our investment securities
portfolio and interest-bearing deposits in other banks, partially offset by
lower deposit funding costs and higher average balances in our investment
securities portfolio during the three months endedSeptember 30, 2020 .
The Provision was
compared to nil for the same period in 2019. This increase was primarily due to
higher expected credit losses as a result of COVID-19 and its impact on
?
is recorded to maintain the Allowance for Credit Losses ("ACL") at levels
deemed adequate to absorb lifetime expected credit losses in our loan and lease
portfolio as of the balance sheet date. Noninterest income was$48.9 million for the three months ended
period in 2019. The decrease was primarily due to a
? credit and debit card fees, a
deposit accounts and a
("BOLI") income, partially offset by a$4.5 million increase in other noninterest income. 59 Table of Contents Noninterest expense was$91.6 million for the three months ended
? period in 2019. The decrease in noninterest expense was primarily due to a
million decrease in card rewards program expense, a
other expenses and a
partially offset by a$1.1 million increase in equipment expense.
Net income was$124.0 million for the nine months endedSeptember 30, 2020 , a decrease of$92.5 million or 43% as compared to the same period in 2019. Basic earnings per share was$0.95 per share for the nine months endedSeptember 30, 2020 , a decrease of$0.67 per share or 41% as compared to the same period in 2019. Diluted earnings per share was$0.95 per share for the nine months endedSeptember 30, 2020 , a decrease of$0.66 per share or 41% as compared to the same period in 2019. The decrease in net income was primarily due to a$92.2 million increase in the Provision, a$33.3 million decrease in net interest income and a$2.0 million decrease in noninterest income, partially offset by a$35.1 million decrease in the provision for income taxes for the nine months endedSeptember 30, 2020 . Our return on average total assets was 0.76% for the nine months endedSeptember 30, 2020 , a decrease of 66 basis points from the same period in 2019, and our return on average total stockholders' equity was 6.16% for the nine months endedSeptember 30, 2020 , a decrease of 497 basis points from the same period in 2019. Our return on average tangible assets was 0.80% for the nine months endedSeptember 30, 2020 , a decrease of 69 basis points from the same period in 2019, and our return on average tangible stockholders' equity was 9.79% for the nine months endedSeptember 30, 2020 , down from 18.04% for the same period in 2019. Our efficiency ratio was 51.32% for the nine months endedSeptember 30, 2020 compared to 48.20% for the same period in 2019.
Our results for the nine months ended
Net interest income was
period in 2019. Our net interest margin was 2.79% for the nine months ended
?
period in 2019. The decrease in net interest income was primarily due to lower
yields in most loan categories and lower yields in our investment securities
portfolio and interest-bearing deposits in other banks. This was partially
offset by lower deposit funding costs.
The Provision was
an increase of
increase was primarily due to higher expected credit losses as a result of
? COVID-19 and its impact on
customers. The Provision is recorded to maintain the ACL at levels deemed
adequate to absorb lifetime expected credit losses in our loan and lease portfolio as of the balance sheet date. Noninterest income was$143.8 million for the nine months ended
period in 2019. The decrease was primarily due to a
credit and debit card fees, a
? deposit accounts, a
a
increase in other income, a
available for sale investment securities and a
and investment services income. Noninterest expense was$279.5 million for the nine months ended
in 2019. The increase in noninterest expense was primarily due to a
million increase in contracted services and professional fees, a
? increase in equipment expense and a
assessment fees, partially offset by a
program expense, a
million decrease in advertising and marketing expense and a$0.5 million decrease in salaries and employee benefits.
Hawaii's economy continues to be significantly impacted by COVID-19 and the responses to it. These responses included stay-at-home orders for businesses deemed nonessential, fromMarch 23, 2020 toMay 31, 2020 and fromAugust 27, 2020 toSeptember 23, 2020 . It also included the implementation of the mandatory 14-day self-quarantine for residents and visitors arriving or returning to theState of Hawaii . For an economy that is heavily dependent on tourism, the combination of these various response measures to the COVID-19 pandemic resulted in an unprecedented increase inHawaii unemployment. While we may see a gradual improvement in unemployment as local businesses and theHawaii tourism industry slowly reopen, the timing and extent of the return of air travel and the recovery of theHawaii tourism industry is highly uncertain 60
Table of Contents
and beyond our control. As such, we increased our Provision in order to maintain adequate reserves for expected losses. We also continued to maintain high levels of liquidity and remained well-capitalized as ofSeptember 30, 2020 .
Total loans and leases were
of
to growth in commercial and industrial loans stemming from PPP loans totaling
? and dealer flooring portfolios during the nine months ended
Additionally, the increase in loans was also due to increases in our
construction portfolio, partially offset by decreases in our consumer
portfolio, primarily due to decreases in credit card balances and indirect
automobile loans, as well as in our residential portfolio.
The ACL was
million or 50% from
aforementioned higher expected credit losses as a result of COVID-19 and its
? impact on
ratio of our ACL to total loans and leases outstanding was 1.45% as ofSeptember 30, 2020 , an increase of 46 basis points compared toDecember 31, 2019 . We continued to invest in high-grade investment securities, primarily
collateralized mortgage obligations issued by the Government National Mortgage
Association ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie
? Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The total
fair value of our investment securities portfolio was$5.7 billion as ofSeptember 30, 2020 , an increase of$1.6 billion or 40% compared toDecember 31, 2019 . The increase was primarily due to purchases in this portfolio as we invested excess liquidity into securities.
Total deposits were
billion or 15% as compared to
was primarily due to a
? billion increase in savings deposit balances, a
money market deposit balances and a
balances. Deposits were increased in anticipation of a surge in funding needs
due to our participation in the PPP and other additional liquidity needs.
Total stockholders' equity was$2.7 billion as ofSeptember 30, 2020 , an increase of$93.7 million or 4% fromDecember 31, 2019 . The increase in
stockholders' equity was primarily due to earnings for the period of
? million and a net unrealized gain in the fair value of our investment
securities of
and paid to the Company's stockholders of
effect adjustment of a change in an accounting principle of
during the nine months endedSeptember 30, 2020 . 61 Table of Contents
Analysis of Results of Operations
Net Interest Income
For the three months ended
Average Balances and Interest Rates
Table 4 Three Months Ended Three Months Ended September 30, 2020 September 30, 2019 Average Average Average Income/ Yield/ Average Income/ Yield/ (dollars in millions) Balance Expense Rate Balance Expense Rate Earning Assets Interest-Bearing Deposits in Other Banks$ 889.6 $ 0.2 0.10 %$ 447.8 $ 2.3 2.02 % Available-for-Sale Investment Securities 5,334.2 20.3 1.53 4,296.3 22.3 2.07 Loans Held for Sale 10.2 0.1 2.67 1.4 - 2.36 Loans and Leases (1) Commercial and industrial 3,230.4 21.6 2.67 2,885.9 30.0 4.12 Commercial real estate 3,418.0 27.8 3.23 3,294.7 37.3 4.49 Construction 637.6 5.2 3.22 477.2 5.6 4.67 Residential: Residential mortgage 3,680.5 37.9 4.12 3,644.9 38.6 4.23 Home equity line 871.1 6.6 3.02 912.8 8.6 3.74 Consumer 1,474.4 20.2 5.46 1,651.4 23.3 5.61 Lease financing 247.4 1.8 2.90 165.4 1.3 3.14 Total Loans and Leases 13,559.4 121.1 3.56 13,032.3 144.7 4.41 Other Earning Assets 53.3 0.5 3.32 84.8 0.9 4.47 Total Earning Assets (2) 19,846.7 142.2 2.86 17,862.6 170.2 3.79 Cash and Due from Banks 307.9 341.7 Other Assets 2,186.9 2,128.2 Total Assets$ 22,341.5 $ 20,332.5 Interest-Bearing Liabilities Interest-Bearing Deposits Savings$ 5,768.3 $ 0.6 0.04 %$ 4,891.5 $ 4.6 0.37 % Money Market 3,288.2 0.4 0.05 3,067.4 7.1 0.92 Time 3,029.8 5.2 0.69 2,872.6 11.1 1.54 Total Interest-Bearing Deposits 12,086.3 6.2 0.20 10,831.5 22.8 0.83 Short-Term Borrowings 45.1 0.3 2.69 370.0 2.6 2.84 Long-Term Borrowings 200.0 1.4 2.77 239.1 1.7 2.82 Total Interest-Bearing Liabilities 12,331.4 7.9 0.26 11,440.6 27.1 0.94 Net Interest Income$ 134.3 $ 143.1 Interest Rate Spread 2.60 % 2.85 % Net Interest Margin 2.70 % 3.19 %
Noninterest-Bearing Demand Deposits 6,805.7
5,742.3 Other Liabilities 500.3 501.2 Stockholders' Equity 2,704.1 2,648.4
Total Liabilities and Stockholders' Equity$ 22,341.5
(1) Non-performing loans and leases are included in the respective average loan
and lease balances. Income, if any, on such loans and leases is recognized on
a cash basis.
(2) Interest income includes taxable-equivalent basis adjustments of
and nil for the three months endedSeptember 30, 2020 and 2019, respectively. 62 Table of Contents
Analysis of Change in Net Interest Income
Table 5 Three Months Ended September 30, 2020 Compared to September 30, 2019 (dollars in millions) Volume Rate Total (1) Change in Interest Income:
Interest-Bearing Deposits in Other Banks$ 1.1 $ (3.2) $ (2.1) Available-for-Sale Investment Securities 4.6 (6.6)
(2.0) Loans Held for Sale 0.1 - 0.1 Loans and Leases Commercial and industrial 3.2 (11.6) (8.4) Commercial real estate 1.3 (10.8) (9.5) Construction 1.6 (2.0) (0.4) Residential: Residential mortgage 0.4 (1.1) (0.7) Home equity line (0.4) (1.6) (2.0) Consumer (2.5) (0.6) (3.1) Lease financing 0.6 (0.1) 0.5 Total Loans and Leases 4.2 (27.8) (23.6) Other Earning Assets (0.3) (0.1) (0.4)
Total Change in Interest Income 9.7 (37.7)
(28.0) Change in Interest Expense: Interest-Bearing Deposits Savings 0.7 (4.7) (4.0) Money Market 0.4 (7.1) (6.7) Time 0.6 (6.5) (5.9)
Total Interest-Bearing Deposits 1.7 (18.3)
(16.6) Short-term Borrowings (2.2) (0.1) (2.3) Long-term Borrowings (0.3) - (0.3)
Total Change in Interest Expense (0.8) (18.4)
(19.2) Change in Net Interest Income$ 10.5 $ (19.3) $ (8.8)
(1) The change in interest income and expense not solely due to changes in volume
or rate has been allocated on a pro-rata basis to the volume and rate columns. Net interest income, on a fully taxable-equivalent basis, was$134.3 million for the three months endedSeptember 30, 2020 , a decrease of$8.8 million or 6% compared to the same period in 2019. Our net interest margin was 2.70% for the three months endedSeptember 30, 2020 , a decrease of 49 basis points from the same period in 2019. The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to lower yields in all loan categories and lower yields in our investment securities portfolio and interest-bearing deposits in other banks, partially offset by lower deposit funding costs and higher average balances in our investment securities portfolio during the three months endedSeptember 30, 2020 . Yields on our loans and leases were 3.56% for the three months endedSeptember 30, 2020 , a decrease of 85 basis points as compared to the same period in 2019. We experienced a decrease in our yields from total loans primarily due to decreases in adjustable rate commercial and industrial and commercial real estate loans, which are typically based on the LIBOR. Decreases in the yield on commercial and industrial loans also stemmed from our participation in the PPP, as these loans have a fixed interest rate of one percent per annum. The yield in our investment securities portfolio was 1.53% for the three months endedSeptember 30, 2020 , a decrease of 54 basis points from the same period in 2019. Deposit funding costs were$6.2 million for the three months endedSeptember 30, 2020 , a decrease of$16.6 million or 73% compared to the same period in 2019. Rates paid on our interest-bearing deposits were 20 basis points for the three months endedSeptember 30, 2020 , a decrease of 63 basis points compared to the same period in 2019. 63 Table of Contents For the nine months endedSeptember 30, 2020 and 2019, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 6. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 7. Average Balances and Interest Rates
Table 6 Nine Months Ended Nine Months Ended September 30, 2020 September 30, 2019 Average Income/ Yield/ Average Income/ Yield/ (dollars in millions) Balance Expense Rate Balance Expense Rate Earning Assets Interest-Bearing Deposits in Other Banks$ 947.3 $ 2.2 0.31 %$ 400.6 $ 6.9 2.31 % Available-for-Sale Investment Securities 4,588.7 59.1 1.72 4,383.6 71.5 2.18 Loans Held for Sale 11.9 0.2 2.31 0.8 - 2.52 Loans and Leases(1) Commercial and industrial 3,202.4 70.5 2.94 3,094.8 97.5 4.21 Commercial real estate 3,423.9 90.7 3.54 3,129.8 108.1 4.62 Construction 586.9 15.8 3.59 565.2 20.0 4.73 Residential: Residential mortgage 3,700.8 111.3 4.01 3,590.2 112.4 4.17 Home equity line 881.2 21.1 3.20 912.4 25.9 3.79 Consumer 1,537.5 63.9 5.55 1,658.7 68.5 5.52 Lease financing 236.4 5.1 2.90 154.0 3.6 3.15 Total Loans and Leases 13,569.1 378.4 3.72 13,105.1 436.0 4.44 Other Earning Assets 57.3 1.6 3.78 84.3 2.2 3.37 Total Earning Assets(2) 19,174.3 441.5 3.07 17,974.4 516.6 3.84 Cash and Due from Banks 310.1 348.1 Other Assets 2,183.5 2,082.8 Total Assets$ 21,667.9 $ 20,405.3 Interest-Bearing Liabilities Interest-Bearing Deposits Savings$ 5,454.7 $ 4.7 0.12 %$ 4,806.0 $ 12.8 0.35 % Money Market 3,208.1 6.1 0.25 3,125.5 22.1 0.95 Time 2,966.9 19.6 0.88 2,999.0 34.8 1.55 Total Interest-Bearing Deposits 11,629.7 30.4 0.35 10,930.5 69.7 0.85 Short-Term Borrowings 279.9 6.0 2.87 145.7 3.0 2.76 Long-Term Borrowings 200.0 4.2 2.77 476.2 10.1 2.84 Total Interest-Bearing Liabilities 12,109.6 40.6 0.45 11,552.4 82.8 0.96 Net Interest Income$ 400.9 $ 433.8 Interest Rate Spread 2.62 % 2.88 % Net Interest Margin 2.79 % 3.22 %
Noninterest-Bearing Demand Deposits 6,365.5
5,769.9 Other Liabilities 505.2 482.7 Stockholders' Equity 2,687.6 2,600.3
Total Liabilities and Stockholders' Equity$ 21,667.9
(1) Non-performing loans and leases are included in the respective average loan
and lease balances. Income, if any, on such loans and leases is recognized on
a cash basis.
(2) Interest income includes taxable-equivalent basis adjustments of
and nil for the nine months endedSeptember 30, 2020 and 2019, respectively. 64 Table of Contents
Analysis of Change in Net Interest Income
Table 7 Nine Months Ended September 30, 2020 Compared to September 30, 2019 (dollars in millions) Volume Rate Total(1) Change in Interest Income:
Interest-Bearing Deposits in Other Banks$ 4.5 $ (9.2) $ (4.7) Available-for-Sale Investment Securities 3.2 (15.6)
(12.4) Loans Held for Sale 0.2 - 0.2 Loans and Leases Commercial and industrial 3.3 (30.3) (27.0) Commercial real estate 9.5 (26.9) (17.4) Construction 0.8 (5.0) (4.2) Residential: Residential mortgage 3.3 (4.4) (1.1) Home equity line (0.9) (3.9) (4.8) Consumer (5.0) 0.4 (4.6) Lease financing 1.8 (0.3) 1.5 Total Loans and Leases 12.8 (70.4) (57.6) Other Earning Assets (0.8) 0.2 (0.6)
Total Change in Interest Income 19.9 (95.0)
(75.1) Change in Interest Expense: Interest-Bearing Deposits Savings 1.4 (9.5) (8.1) Money Market 0.6 (16.6) (16.0) Time (0.4) (14.8) (15.2)
Total Interest-Bearing Deposits 1.6 (40.9)
(39.3) Short-Term Borrowings 2.9 0.1 3.0 Long-Term Borrowings (5.7) (0.2) (5.9)
Total Change in Interest Expense (1.2) (41.0)
(42.2) Change in Net Interest Income$ 21.1 $ (54.0) $ (32.9)
(1) The change in interest income and expense not solely due to changes in volume
or rate has been allocated on a pro-rata basis to the volume and rate columns. Net interest income, on a fully taxable-equivalent basis, was$400.9 million for the nine months endedSeptember 30, 2020 , a decrease of$32.9 million or 8% compared to the same period in 2019. Our net interest margin was 2.79% for the nine months endedSeptember 30, 2020 , a decrease of 43 basis points from the same period in 2019. The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to lower yields in most loan categories and lower yields in our investment securities portfolio and interest-bearing deposits in other banks. This was partially offset by lower deposit funding costs. Yields on our loans and leases were 3.72% for the nine months endedSeptember 30, 2020 , a decrease of 72 basis points as compared to the same period in 2019. We experienced a decrease in our yield from total loans primarily due to decreases in adjustable rate commercial and industrial and commercial real estate loans, which are typically based on LIBOR. Decreases in the yield on commercial and industrial loans also stemmed from our participation in the PPP, as these loans have a fixed interest rate of one percent per annum. For the nine months endedSeptember 30, 2020 , the yield in our investment securities portfolio was 1.72%, a decrease of 46 basis points compared to the same period in 2019. Deposit funding costs were$30.4 million for the nine months endedSeptember 30, 2020 , a decrease of$39.3 million or 56% compared to the same period in 2019. Rates paid on our interest-bearing deposits were 35 basis points for the nine months endedSeptember 30, 2020 , a decrease of 50 basis points compared to the same period in 2019. TheFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is affected by changes in the prime interest rate. The prime rate began in 2019 at 5.50% and decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and September) and 25 basis points inOctober 2019 to end the year at 4.75%. During 2020, the prime rate decreased 150 basis points in March to end the first quarter at 3.25%, where it remained as at the end of the third quarter of 2020. As noted above, our loan portfolio is also impacted by changes in the LIBOR. AtSeptember 30, 2020 , the one-month and three-monthU.S. dollar LIBOR interest rates were 0.15% and 0.23%, respectively, while atSeptember 30, 2019 , the one-month and three-monthU.S. dollar LIBOR interest rates were 2.02% and 2.09%, respectively. The target range for the federal funds rate, which is the cost of immediately available overnight funds, began 2019 at 2.25% to 2.50% and decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and September) and 25 basis points inOctober 2019 to end the year at 1.50 to 1.75%. During 2020, the target range for the federal funds rate decreased 150 basis points in March to end
the first quarter 65 Table of Contents
at 0.00% to 0.25%, where it remained as at the end of the third quarter of 2020. InSeptember 2020 , theFederal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels through 2023. The decrease in the target range for the federal funds rate in 2020 was largely an emergency measure by theFederal Reserve aimed at mitigating the economic impact of COVID-19.
Provision for Credit Losses
The Provision was$5.1 million for the three months endedSeptember 30, 2020 , compared to nil for the same period in 2019. For the three months endedSeptember 30, 2020 , the Provision included$3.7 million in provision for credit losses for loans and leases and$1.4 million in provision for credit losses for the reserve for unfunded commitments. We recorded net recoveries of loans and leases of$0.1 million for the three months endedSeptember 30, 2020 and net charge-offs of$5.6 million for the three months endedSeptember 30, 2019 . This represented charge-offs of nil and 0.17% of average loans and leases, on an annualized basis, for the three months endedSeptember 30, 2020 and 2019, respectively. The Provision was$101.7 million for the nine months endedSeptember 30, 2020 , which represented an increase of$92.2 million compared to the same period in 2019. For the nine months endedSeptember 30, 2020 , the Provision included$94.0 million in provision for credit losses for loans and leases and$7.7 million in provision for credit losses for the reserve for unfunded commitments. The increase in the Provision was primarily due to an adjustment related to COVID-19 and the impact we expect it to have on our customers. We recorded net charge-offs of loans and leases of$29.4 million and$18.3 million for the nine months endedSeptember 30, 2020 and 2019, respectively. This represented net charge-offs of 0.29% and 0.19% of average loans and leases, on an annualized basis, for the nine months endedSeptember 30, 2020 and 2019, respectively. The ACL was$195.9 million as ofSeptember 30, 2020 , an increase of$65.3 million or 50% fromDecember 31, 2019 and represented 1.45% of total outstanding loans and leases as ofSeptember 30, 2020 , compared to 0.99% of total outstanding loans and leases as ofDecember 31, 2019 . The reserve for unfunded commitments was$24.6 million as ofSeptember 30, 2020 , compared to$0.6 million as ofDecember 31, 2019 . The Provision is recorded to maintain the ACL and the reserve for unfunded commitments at levels deemed adequate by management based on the factors noted in the "Risk Governance and Quantitative and Qualitative Disclosures About Market Risk - Credit Risk" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). Noninterest Income Table 8 presents the major components of noninterest income for the three months endedSeptember 30, 2020 and 2019 and Table 9 presents the major components of noninterest income for the nine months endedSeptember 30, 2020 and 2019: Noninterest Income Table 8 Three Months Ended September 30, Dollar Percent (dollars in thousands) 2020 2019 Change Change
Service charges on deposit accounts
(24) % Credit and debit card fees 14,049 16,839 (2,790)
(17)
Other service charges and fees 9,021 8,903 118
1
Trust and investment services income 8,664 8,698 (34)
-
Bank-owned life insurance 4,903 5,743 (840)
(15)
Investment securities gains, net 24 - 24
n/m Other 5,714 1,243 4,471 n/m Total noninterest income$ 48,898 $ 49,980 $ (1,082) (2) % n/m - Denotes a variance that is not a meaningful metric to inform the change in noninterest income for the three months endedSeptember 30, 2020 to the same period in 2019. 66 Table of Contents Noninterest Income Table 9 Nine Months Ended September 30, Dollar Percent (dollars in thousands) 2020 2019 Change Change
Service charges on deposit accounts
(13) % Credit and debit card fees 39,868 50,123 (10,255)
(20)
Other service charges and fees 25,472 27,435 (1,963)
(7)
Trust and investment services income 26,919 26,247 672
3
Bank-owned life insurance 11,595 12,946 (1,351)
(10)
Investment securities losses, net (102) (2,592) 2,490
n/m Other 18,630 6,929 11,701 n/m Total noninterest income$ 143,782 $ 145,825 $ (2,043) (1) %
n/m - Denotes a variance that is not a meaningful metric to inform the change in
noninterest income for the nine months ended
Total noninterest income was$48.9 million for the three months endedSeptember 30, 2020 , a decrease of$1.1 million or 2% as compared to the same period in 2019. Total noninterest income was$143.8 million for the nine months endedSeptember 30, 2020 , a decrease of$2.0 million or 1% as compared to the same period in 2019.
Service charges on deposit accounts were$6.5 million for the three months endedSeptember 30, 2020 , a decrease of$2.0 million or 24% as compared to the same period in 2019. This decrease was primarily due to a$1.8 million decrease in overdraft and checking account fees. Service charges on deposit accounts were$21.4 million for the nine months endedSeptember 30, 2020 , a decrease of$3.3 million or 13% as compared to the same period in 2019. This decrease was primarily due to a$3.7 million decrease in overdraft and checking account fees and a$0.6 million decrease in ATM interchange fees from customers, partially offset by a$0.9 million increase in account analysis service charges. Credit and debit card fees were$14.0 million for the three months endedSeptember 30, 2020 , a decrease of$2.8 million or 17% as compared to the same period in 2019. This decrease was primarily due to a$2.4 million decrease in interchange settlement fees from credit and debit cards, a$1.9 million decrease in merchant service revenues and a$0.4 million decrease in ATM surcharge fees. This was partially offset by a$2.1 million decrease in network association dues. Credit and debit card fees were$39.9 million for the nine months endedSeptember 30, 2020 , a decrease of$10.3 million or 20% as compared to the same period in 2019. This decrease was primarily due to a$6.2 million decrease in interchange settlement fees from credit and debit cards, a$5.6 million decrease in merchant service revenues and a$1.9 million decrease in ATM surcharge fees. This was partially offset by a$3.9 million decrease in network association dues. Other service charges and fees were$9.0 million for the three months endedSeptember 30, 2020 , an increase of$0.1 million or 1% as compared to the same period in 2019. Other service charges and fees were$25.5 million for the nine months endedSeptember 30, 2020 , a decrease of$2.0 million or 7% as compared to the same period in 2019. This decrease was primarily due to a$0.5 million decrease in insurance income, a$0.5 million decrease in online banking fees, a$0.5 million decrease in service fees related to participation loans, a$0.4 million decrease in foreign exchange processing fees, a$0.2 million decrease in cash management service fees and a$0.2 million decrease in wire transfer fees. This was partially offset by a$0.7 million increase in fees from annuities
and securities.
Trust and investment services income was$8.7 million for the three months endedSeptember 30, 2020 , a minimal change as compared to the same period in 2019. Trust and investment services income was$26.9 million for the nine months endedSeptember 30, 2020 , an increase of$0.7 million or 3% as compared to the same period in 2019. This increase was primarily due to a$1.0 million increase in investment management fees and a$0.5 million increase in money market fund trust account fees, partially offset by a$0.6 million decrease in business
cash management fees.
BOLI income was$4.9 million for the three months endedSeptember 30, 2020 , a decrease of$0.8 million or 15% as compared to the same period in 2019. This decrease was due to a$1.4 million decrease in death benefit proceeds from life insurance policies, offset by a$0.6 million increase in BOLI earnings. BOLI income was$11.6 million for the nine months endedSeptember 30, 2020 , a decrease of$1.4 million or 10% as compared to the same period in 2019. This decrease was due to a$1.1 million decrease in death benefit proceeds from life insurance policies and a$0.3 million decrease in BOLI earnings. 67 Table of Contents Net gains on the sale of investment securities were approximately nil for both the three months endedSeptember 30, 2020 and 2019. Net losses on the sale of investment securities were$0.1 million and$2.6 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The decrease in losses of$2.5 million was primarily due to our investment portfolio restructuring and sale of 48 investment securities inJanuary 2019 , which contributed to the$2.6 million loss for the nine months endedSeptember 30, 2019 . Other noninterest income was$5.7 million for the three months endedSeptember 30, 2020 , an increase of$4.5 million as compared to the same period in 2019. This increase was primarily due to a$3.8 million increase in gains on the sale of residential loans to government-sponsored enterprises. The Company sold$95.9 million residential loans for the three months endedSeptember 30, 2020 . Increases in other noninterest income also stemmed from a$1.5 million increase in volume-based incentives and a$0.4 million increase in gains recognized in income related to derivative contracts. This was partially offset by a$1.4 million decrease in customer-related interest rate swap fees. Other noninterest income was$18.6 million for the nine months endedSeptember 30, 2020 , an increase of$11.7 million as compared to the same period in 2019. This increase was primarily due to a$6.1 million increase in gains on the sale of residential loans to government-sponsored enterprises. The Company sold$344.3 million residential loans for the nine months endedSeptember 30, 2020 . Increases in other noninterest income also stemmed from a$3.2 million increase in customer-related interest rate swap fees, a$2.3 million increase in volume-based incentives and a$0.8 million increase in mortgage servicing rights, partially offset by a$0.5 million decrease in market adjustments for foreign exchange transactions. Noninterest Expense Table 10 presents the major components of noninterest expense for the three months endedSeptember 30, 2020 and 2019 and Table 11 presents the major components of noninterest expense for the nine months endedSeptember 30, 2020 and 2019: Noninterest Expense Table 10 Three Months Ended September 30, Dollar Percentage (dollars in thousands) 2020 2019 Change Change
Salaries and employee benefits$ 44,291 $ 44,955 $ (664) (1) % Contracted services and professional fees 15,073 14,649
424 3 Occupancy 6,921 7,250 (329) (5) Equipment 5,137 4,024 1,113 28
Regulatory assessment and fees 2,445 1,992
453 23 Advertising and marketing 1,374 1,647 (273) (17) Card rewards program 5,046 6,930 (1,884) (27) Other 11,342 12,019 (677) (6) Total noninterest expense$ 91,629 $ 93,466 $ (1,837) (2) % Noninterest Expense Table 11 Nine Months Ended September 30, Dollar Percentage (dollars in thousands) 2020 2019 Change Change
Salaries and employee benefits$ 131,534 $ 132,000 $ (466) - % Contracted services and professional fees 46,606 42,597
4,009 9 Occupancy 21,466 21,522 (56) - Equipment 15,052 12,852 2,200 17
Regulatory assessment and fees 6,491 5,588
903 16 Advertising and marketing 4,599 5,593 (994) (18) Card rewards program 17,224 21,326 (4,102) (19) Other 36,573 37,901 (1,328) (4) Total noninterest expense$ 279,545 $ 279,379 $ 166 - % Total noninterest expense was$91.6 million for the three months endedSeptember 30, 2020 , a decrease of$1.8 million or 2% as compared to the same period in 2019. Total noninterest expense was$279.5 million for the nine months endedSeptember 30, 2020 , an increase of 0.2 million or less than 1% as compared to the same period in 2019. 68 Table of Contents Salaries and employee benefits expense was$44.3 million for the three months endedSeptember 30, 2020 , a decrease of$0.7 million or 1% as compared to the same period in 2019. This was primarily due to a$1.4 million decrease in other compensation, primarily related to bonuses resulting from the initial public offering and related stock-based compensation, a$0.6 million increase in deferred loan origination costs, a$0.4 million decrease in group health plan costs and a$0.4 million decrease in incentive compensation. This was partially offset by a$2.3 million increase in base salaries and related payroll taxes. Salaries and employee benefits expense was$131.5 million for the nine months endedSeptember 30, 2020 , a decrease of$0.5 million or less than 1% as compared to the same period in 2019. This decrease was primarily due to a$4.8 million increase in deferred loan origination costs and a$2.2 million decrease in other compensation, primarily related to bonuses resulting from the initial public offering and related stock-based compensation. This was partially offset by a$5.5 million increase in base salaries and related payroll taxes and a$0.9 million increase in incentive compensation. Contracted services and professional fees were$15.1 million for the three months endedSeptember 30, 2020 , an increase of$0.4 million or 3% as compared to the same period in 2019. This increase was primarily due to a$0.8 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements, and a$0.3 million increase in outside services, primarily attributable to marketing and new customer services. This was partially offset by a$0.6 million decrease in audit, legal and consultant fees. Contracted services and professional fees were$46.6 million for the nine months endedSeptember 30, 2020 , an increase of$4.0 million or 9% as compared to the same period in 2019. This increase was primarily due to a$2.9 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements, and a$1.3 million increase in outside services, primarily attributable to marketing and new customer services. Occupancy expense was$6.9 million for the three months endedSeptember 30, 2020 , a decrease of$0.3 million or 5% as compared to the same period in 2019. Occupancy expense was$21.5 million for the nine months endedSeptember 30, 2020 , a decrease of$0.1 million or less than 1% as compared
to the same period in 2019. Equipment expense was$5.1 million for the three months endedSeptember 30, 2020 , an increase of$1.1 million or 28% as compared to the same period in 2019. This increase was primarily due to a$0.8 million increase in technology-related license and maintenance fees and a$0.3 million increase in furniture and equipment depreciation expense. Equipment expense was$15.1 million for the nine months endedSeptember 30, 2020 , an increase of$2.2 million or 17% as compared to the same period in 2019. This increase was primarily due to a$1.1 million increase in technology-related license and maintenance fees and a$0.9 million increase in furniture and equipment depreciation expense. Regulatory assessment and fees were$2.4 million for the three months endedSeptember 30, 2020 , an increase of$0.5 million or 23% as compared to the same period in 2019. This increase was primarily due to a$0.5 million increase in theFDIC insurance assessment. Regulatory assessment and fees were$6.5 million for the nine months endedSeptember 30, 2020 , an increase of$0.9 million or 16% as compared to the same period in 2019. This increase was primarily due to a$0.9 million increase in theFDIC insurance assessment. Advertising and marketing expense was$1.4 million for the three months endedSeptember 30, 2020 , a decrease of$0.3 million or 17% as compared to the same period in 2019. Advertising and marketing expense was$4.6 million for the nine months endedSeptember 30, 2020 , a decrease of$1.0 million or 18% as compared to the same period in 2019. This decrease was primarily due to a$0.8 million decrease in advertising costs and a$0.2 million decrease due to higher vendor reimbursements. Card rewards program expense was$5.0 million for the three months endedSeptember 30, 2020 , a decrease of$1.9 million or 27% as compared to the same period in 2019. This decrease was primarily due to a$0.9 million decrease in priority rewards card redemptions, a$0.7 million decrease in interchange fees paid to our credit card partners and a$0.3 million decrease in credit card cash reward redemptions. Card rewards program expense was$17.2 million for the nine months endedSeptember 30, 2020 , a decrease of$4.1 million or 19% as compared to the same period in 2019. This decrease was primarily due to a$2.3 million decrease in priority rewards card redemptions, a$1.0 million decrease in interchange fees paid to our credit card partners and a$0.8 million decrease in credit card cash reward redemptions. 69 Table of Contents Other noninterest expense was$11.3 million for the three months endedSeptember 30, 2020 , decrease of$0.7 million or 6% as compared to the same period in 2019. This decrease was primarily due to a$0.5 million decrease in pension-related expenses, a$0.4 million decrease in travel expenses, a$0.3 million decrease in postage expenses and a$0.3 million decrease in shipping and delivery expenses. This was partially offset by a$1.1 million increase in other tax expense. Other noninterest expense was$36.6 million for the nine months endedSeptember 30, 2020 , a decrease of$1.3 million or 4% as compared to the same period in 2019. This decrease was primarily due to a$1.4 million decrease in pension-related expenses. Provision for Income Taxes
The provision for income taxes was$21.1 million (an effective tax rate of 24.48%) for the three months endedSeptember 30, 2020 , compared with the provision for income taxes of$25.4 million (an effective tax rate of 25.50%) for the same period in 2019. The provision for income taxes was$39.0 million (an effective tax rate of 23.93%) for the nine months endedSeptember 30, 2020 , compared with the provision for income taxes of$74.1 million (an effective tax rate of 25.50%) for the same period in 2019. The decrease in the effective tax rate was primarily due to the reduction in pretax income compared to prior periods and a state tax settlement withBNP Paribas USA, Inc. during the period endedMarch 31, 2020 , related to periods during which the Company was included in the state combined returns ofBNP Paribas USA, Inc.
Analysis of Business Segments
Our business segments are Retail Banking, Commercial Banking andTreasury and Other. Table 12 summarizes net income from our business segments for the three and nine months endedSeptember 30, 2020 and 2019. Additional information about operating segment performance is presented in "Note 18. Reportable Operating Segments" contained in our unaudited interim consolidated financial statements. In 2019, the Company made changes to the internal measurement of segment operating profits for the purpose of evaluating segment performance and resource allocation. The primary reason for the change was to align deposit balances within the business segment that directly manages them. Specifically, certain deposit balances previously included as part of the Retail Banking segment have been reclassified to the Commercial Banking segment. The reallocation of select deposit balances affected net interest income, net interest income after provision for credit losses, noninterest income, provision for income taxes and net income. The Company has reported its selected financial information using the new deposit balance alignments for the three and nine months endedSeptember 30, 2020 . The Company has restated the selected financial information for the three and nine months endedSeptember 30, 2019 in order to conform
with the current presentation.
Additionally, during the fourth quarter of 2019, the Company changed its assumptions embedded in allocating deposit costs to business segments. The Company has reported its selected financial information using the new deposit cost assumptions starting with the fourth quarter of 2019.
Business Segment Net Income Table 12 Three Months Ended Nine Months Ended September 30, September 30, (dollars in thousands) 2020 2019 2020 2019 Retail Banking$ 50,962 $ 53,552 $ 105,026 $ 159,040 Commercial Banking 21,595 24,659 33,213 70,788 Treasury and Other (7,456) (4,012) (14,224) (13,272) Total$ 65,101 $ 74,199 $ 124,015 $ 216,556
Retail Banking. Our Retail Banking segment includes the financial products and services we provide to consumers, small businesses and certain commercial customers. Loan and lease products offered include residential and commercial mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans and small business loans and leases. Deposit products offered include checking, savings and time deposit accounts. Our Retail Banking segment also includes our wealth management services. Net income for the Retail Banking segment was$51.0 million for the three months endedSeptember 30, 2020 , a decrease of$2.6 million or 5% as compared to the same period in 2019. The decrease in net income for the Retail Banking segment was primarily due to a$2.2 million decrease in net interest income and a$2.1 million increase in the Provision, partially offset by a$1.2 million decrease in the provision for income taxes. The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio. 70
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The increase in the Provision was primarily due to the adjustment related to COVID-19 and the impact that we expect it to have on our customers. The decrease in the provision for income taxes was primarily due to lower pretax income. Net income for the Retail Banking segment was$105.0 million for the nine months endedSeptember 30, 2020 , a decrease of$54.0 million or 34% as compared to the same period in 2019. The decrease in net income for the Retail Banking segment was primarily due to a$42.2 million increase in the Provision, a$31.1 million decrease in net interest income and a$2.8 million increase in noninterest expense, offset by a$20.1 million decrease in the provision for income taxes and a$2.0 million increase in noninterest income. The increase in the Provision was primarily due to the adjustment related to COVID-19 and the impact that we expect it to have on our customers. The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment and an increase in contracted services and professional fees, partially offset by a decrease in salaries and benefits expense. The decrease in the provision for income taxes was primarily due to the decrease in pretax income. The increase in noninterest income was primarily due to higher gains on the sale of residential mortgage loans, partially offset by decreases in overdraft and checking account fees and other service charges
and fees. The increase in total assets for the Retail Banking segment was primarily due to PPP loans, partially offset by the sale of residential mortgages during the nine months endedSeptember 30, 2020 . Commercial Banking. Our Commercial Banking segment includes our corporate banking, residential and commercial real estate loans, commercial lease financing, automobile loans and auto dealer financing, business deposit products and credit cards that we provide primarily to middle market and large companies inHawaii ,Guam , Saipan andCalifornia . Net income for the Commercial Banking segment was$21.6 million for the three months endedSeptember 30, 2020 , a decrease of$3.1 million or 12% as compared to the same period in 2019. The decrease in net income for the Commercial Banking segment was primarily due to a$3.2 million decrease in net interest income and a$1.5 million increase in the Provision, partially offset by a$1.9 million decrease in the provision for income taxes. The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio. The increase in the Provision was primarily due to the adjustment related to COVID-19 and the expected impact that it will have on our customers. The decrease in the provision for income taxes was primarily due to the decrease in pretax income. Net income for the Commercial Banking segment was$33.2 million for the nine months endedSeptember 30, 2020 , a decrease of$37.6 million or 53% as compared to the same period in 2019. The decrease in net income for the Commercial Banking segment was primarily due to a$42.3 million increase in the Provision, a$5.3 million decrease in net interest income, a$2.2 million increase in noninterest expense and a$2.0 million decrease in noninterest income, partially offset by a$14.3 million decrease in the provision for income taxes. The increase in the Provision was primarily due to the adjustment related to COVID-19 and the expected impact that it will have on our customers. The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio. The increase in noninterest expense was primarily due to increases in salaries and benefits expense, contracted services and professional fees, higher overall expenses that were allocated to the Commercial Banking segment, and an increase in other tax expense, partially offset by a decrease in card reward expenses. The decrease in noninterest income was primarily due to a decrease in credit and debit card fees, partially offset by an increase in customer-related swap fees, an increase in volume-based incentives and the loss on the sale of our commercial and industrial loans in 2019. The decrease in the provision for income taxes was primarily due to the decrease in pretax income.
The decrease in total assets for the Commercial Banking segment was primarily due to decreases in our Shared National
Credits, dealer flooring portfolios, indirect automobile loans and credit card balances, partially offset by higher draws on lines by existing customers and PPP loans during the nine months endedSeptember 30, 2020 . 71 Table of ContentsTreasury and Other. OurTreasury and Other segment includes our treasury business, which consists of corporate asset and liability management activities, including interest rate risk management. The assets and liabilities (and related interest income and expense) of our treasury business consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, short- and long-term borrowings and bank-owned properties. Our primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, foreign exchange income related to customer driven currency requests from merchants and island visitors and management of bank-owned properties inHawaii andGuam . The net residual effect of the transfer pricing of assets and liabilities is included inTreasury and Other, along with the elimination of intercompany transactions. Other organizational units (Technology, Operations, Credit and Risk Management, Human Resources, Finance, Administration, Marketing andCorporate and Regulatory Administration ) provide a wide range of support to our other income earning segments. Expenses incurred by these support units are charged to the applicable business segments through an internal cost allocation process. Net loss for theTreasury and Other segment was$7.5 million for the three months endedSeptember 30, 2020 , an increase in loss of$3.4 million or 86% as compared to the same period in 2019. The increase in the net loss was primarily due to a$3.8 million increase in net interest expense, a$1.4 million increase in the Provision and a$1.0 million decrease in noninterest income, partially offset by a$1.5 million decrease in noninterest expense and a$1.2 million increase in the benefit for income taxes. The increase in net interest expense was primarily due to lower earnings credits as a result of lower average yields in our loan portfolio and lower average yields in our interest-bearing deposits in other banks and investment securities portfolio, partially offset by a decrease in transfer pricing charges as a result of lower yields on our deposit portfolio. The increase in the Provision was primarily due to the adjustment related to COVID-19 and the expected impact that it will have on our customers. The decrease in noninterest income was primarily due to a decrease in BOLI income. The decrease in noninterest expense was primarily due to a decrease in salaries and employee benefits expense. The increase in the benefit for income taxes was primarily due to the increase in pretax loss. Net loss for theTreasury and Other segment was$14.2 million for the nine months endedSeptember 30, 2020 , an increase in loss of$1.0 million or 7% as compared to the same period in 2019. The increase in net loss was primarily due to a$7.7 million increase in the Provision and a$2.0 million decrease in noninterest income, partially offset by a$4.9 million decrease in noninterest expense and a$3.1 million increase in net interest income. The increase in the Provision was primarily due to the adjustment related to COVID-19 and the expected impact that it will have on our customers. The decrease in noninterest income was primarily due to decreases in ATM surcharge fees, BOLI income, ATM interchange from customers and other service charges and fees, partially offset by a decrease in net losses on the sale of investment securities as a result of the investment portfolio restructuring and sale of 48 investment securities inJanuary 2019 . The decrease in noninterest expense was primarily due to higher overall expenses that led to a larger credit allocation to theTreasury and Other segment, as well as decreases in pension-related expenses and advertising and marketing expenses, partially offset by an increase in equipment expenses. The increase in net interest income was primarily due to a decrease in transfer pricing charges as a result of lower yields on our deposit portfolio, partially offset by lower earnings credits as a result of lower average yields in our loan portfolio and lower average yields in our investment securities portfolio and interest-bearing deposits in other banks. The increase in total assets for theTreasury and Other segment was primarily due to increases in the investment securities portfolio and interest-bearing deposits in other banks during the nine months endedSeptember 30, 2020 .
Analysis of Financial Condition
Liquidity Liquidity refers to our ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. We consider the effective and prudent management of liquidity to be fundamental to our health and strength. Our objective is to manage our cash flow and liquidity reserves so that they are adequate to fund our obligations and other commitments on a timely basis and at a reasonable cost. Liquidity is managed to ensure stable, reliable and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. Funding requirements are impacted by loan originations and refinancings, deposit balance changes, liability issuances and settlements and off-balance sheet funding commitments. We consider and comply with various regulatory and internal guidelines regarding required liquidity levels and periodically monitor our liquidity 72
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position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability and off-balance sheet positions. The Company's Asset Liability Management Committee ("ALCO") monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk. Immediate liquid resources are available in cash, which is primarily on deposit with theFederal Reserve Bank of San Francisco (the "FRB"). As ofSeptember 30, 2020 andDecember 31, 2019 , cash and cash equivalents were$0.8 billion and$0.7 billion , respectively. Potential sources of liquidity also include investment securities in our available-for-sale portfolio. The estimated fair value of our available-for-sale investment securities were$5.7 billion and$4.1 billion as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. As ofSeptember 30, 2020 andDecember 31, 2019 , we maintained our excess liquidity primarily in collateralized mortgage obligations issued byGinnie Mae , Fannie Mae and Freddie Mac. As ofSeptember 30, 2020 , our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 4.3 years. These funds offer substantial resources to meet either new loan demand or to help offset reductions in our deposit funding base. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and the FRB. As ofSeptember 30, 2020 , we had borrowing capacity of$2.0 billion from the FHLB and$1.0 billion from the FRB based on the amount of collateral pledged. As ofDecember 31, 2019 , we had borrowing capacity of$1.7 billion from the FHLB and$596.8 million from the FRB based on the amount of collateral pledged. Our core deposits have historically provided us with a long-term source of stable and relatively lower cost of funding. Our core deposits, defined as all deposits exclusive of time deposits exceeding$250,000 , totaled$17.4 billion and$15.1 billion as ofSeptember 30, 2020 andDecember 31, 2019 , respectively, which represented 92% of our total deposits as of bothSeptember 30, 2020 andDecember 31, 2019 . These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, however, deposit levels could decrease if interest rates increase significantly or if corporate customers increase investing activities and reduce deposit balances. The Company's routine funding requirements are expected to consist primarily of general corporate needs and capital to be returned to our shareholders. We expect to meet these obligations from dividends paid by the Bank to the Parent. Additional sources of liquidity available to us include selling residential real estate loans in the secondary market, short- and long-term borrowings and the issuance of long-term debt and equity securities. At the start of the pandemic, we increased our liquidity position through additional public time deposits in anticipation of a surge in funding needs due to our participation in the PPP and other additional liquidity needs. While our public time deposits have since decreased from the second quarter of 2020, we have continued to maintain strong levels of liquidity as ofSeptember 30, 2020 .Investment Securities
Table 13 presents the estimated fair value of our available-for-sale investment
securities portfolio as of
Investment Securities Table 13 September 30, December 31, (dollars in thousands) 2020 2019
$ 29,888 Government-sponsored enterprises debt securities -
101,439
Mortgage-backed securities: Residential - Government agency 193,948
291,209
Residential - Government-sponsored enterprises 431,842
399,492
Commercial - Government agency 751,922 - Commercial - Government-sponsored enterprises 498,273
101,719
Collateralized mortgage obligations: Government agency 2,085,976
2,381,278
Government-sponsored enterprises 1,585,966
770,619
Total available-for-sale securities$ 5,692,883
$ 4,075,644 73 Table of Contents
Table 14 presents the maturity distribution at amortized cost and
weighted-average yield to maturity of our available-for-sale investment
securities portfolio as of
Maturities and Weighted-Average Yield on Securities(1)
Table 14
1 Year or Less After 1 Year - 5 Years After 5 Years - 10 Years Over 10 Years Total Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Fair
(dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Value As ofSeptember 30, 2020 Available-for-sale securities U.S. Treasury and government agency debt securities $ - - %$ 38.3 0.82 % $ 3.3 1.01 %$ 100.8 1.38 %$ 142.4 1.23 %$ 145.0 Mortgage-backed securities(2): Residential - Government agency - - 188.8 2.39 - - - - 188.8 2.39 193.9 Residential - Government-sponsored enterprises - - 378.5 2.38 38.8 1.40 - - 417.3 2.29 431.8 Commercial - Government agency - - 497.5 2.21 136.9 1.68 103.5 1.32 737.9 1.99 751.9 Commercial - Government-sponsored enterprises - - 41.9 2.27 377.9 1.64 67.0 1.68 486.8 1.70 498.3 Collateralized mortgage obligations(2): Government agency 97.5 1.96 1,825.1 1.62 125.0 1.25 - - 2,047.6 1.62 2,086.0 Government-sponsored enterprises 69.5 2.17 830.8 1.61 663.5 1.42 - - 1,563.8 1.56 1,586.0 Total available-for-sale securities as of September 30, 2020$ 167.0 2.05 %$ 3,800.9 1.81 %$ 1,345.4 1.49 %$ 271.3 1.43 %$ 5,584.6 1.72 %$ 5,692.9
(1) Weighted-average yields were computed on a fully taxable-equivalent basis.
(2) Maturities for mortgage-backed securities and collateralized mortgage
obligations anticipate future prepayments. The fair value of our available-for-sale investment securities portfolio was$5.7 billion as ofSeptember 30, 2020 , an increase of$1.6 billion or 40% compared toDecember 31, 2019 . Our available-for-sale investment securities are carried at fair value with changes in fair value reflected in other comprehensive income or through the Provision. As ofSeptember 30, 2020 , we maintained all of our investment securities in the available-for-sale category recorded at fair value in the unaudited interim consolidated balance sheets, with$3.7 billion invested in collateralized mortgage obligations issued byGinnie Mae , Fannie Mae and Freddie Mac. Our available-for-sale portfolio also included$1.9 billion in mortgage-backed securities issued byGinnie Mae , Freddie Mac, Fannie Mae and municipal housing authorities and$145.0 million in debt securities issued by theU.S Treasury and government agencies (US International Development Finance Corporation bonds). We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities and change the composition of our investment securities portfolio. We conduct a regular assessment of our investment securities portfolio to determine whether any securities are impaired. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and the ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through the ACL is recognized in other comprehensive income. For the three and nine months endedSeptember 30, 2020 , we did not record any credit losses related to our investment securities portfolio. Gross unrealized gains in our investment securities portfolio were$111.7 million and$19.0 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. Gross unrealized losses in our investment securities portfolio were$3.4 million and$24.0 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. The increase in unrealized gains in our investment securities portfolio was primarily due to lower market interest rates as ofSeptember 30, 2020 , relative toDecember 31, 2019 , resulting in a higher valuation. The increase in unrealized gain positions was primarily related to our mortgage-backed securities and collateralized mortgage obligations, the fair values of which are sensitive to changes in market interest rates. We are required to hold non-marketable equity securities, comprised of FHLB stock, as a condition of our membership in the FHLB system. Our FHLB stock is accounted for at cost, which equals par or redemption value. As ofSeptember 30, 2020 andDecember 31, 2019 , we held FHLB stock of$18.1 million and$34.1 million , respectively, which is recorded as a component of other assets in our unaudited interim consolidated balance sheets. 74 Table of Contents
See "Note 2.
Loans and Leases
Table 15 presents the composition of our loan and lease portfolio by major
categories as of
Loans and Leases Table 15 September 30, December 31, (dollars in thousands) 2020 2019 Commercial and industrial$ 3,170,262 $ 2,743,242 Commercial real estate 3,461,085 3,463,953 Construction 662,871 519,241 Residential: Residential mortgage 3,669,051 3,768,936 Home equity line 864,789 893,239 Total residential 4,533,840 4,662,175 Consumer 1,425,934 1,620,556 Lease financing 245,977 202,483 Total loans and leases$ 13,499,969 $ 13,211,650 Total loans and leases were$13.5 billion as ofSeptember 30, 2020 , an increase of$288.3 million or 2% fromDecember 31, 2019 with increases in commercial and industrial loans, construction loans and lease financing. The increase in total loans and leases was primarily due to our participation in the PPP which had a total amortized cost basis of$920.2 million as ofSeptember 30, 2020 . While we have not experienced declines in our loan portfolio in the third quarter, it is possible that the effects of COVID-19 on the economy could result in less demand for our loan products.
Commercial and industrial loans are made primarily to corporations, middle market and small businesses for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. We also offer a variety of automobile dealer flooring lines to our customers inHawaii andCalifornia to assist with the financing of their inventory. Commercial and industrial loans were$3.2 billion as ofSeptember 30, 2020 , an increase of$427.0 million or 16% fromDecember 31, 2019 . This increase was primarily due to PPP loans totaling$920.2 million , offset by decreases in our Shared National Credits and dealer flooring portfolios during the nine months endedSeptember 30, 2020 . Commercial real estate loans are secured by first mortgages on commercial real estate at loan to value ("LTV") ratios generally not exceeding 75% and a minimum debt service coverage ratio of 1.20 to 1. The commercial properties are predominantly apartments, neighborhood and grocery anchored retail, industrial, office, and to a lesser extent, specialized properties such as hotels. The primary source of repayment for investor property is cash flow from the property and for owner occupied property is the operating cash flow from the business. Commercial real estate loans were$3.5 billion as ofSeptember 30, 2020 , a decrease of$2.9 million or less than 1% fromDecember 31, 2019 . Construction loans are for the purchase or construction of a property for which repayment will be generated by the property. Loans in this portfolio are primarily for the purchase of land, as well as for the development of commercial properties, single family homes and condominiums. We classify loans as construction until the completion of the construction phase. Following completion of the construction phase, if a loan is retained by the Bank, the loan is reclassified to the commercial real estate or residential real estate classes of loans. Construction loans were$662.9 million as ofSeptember 30, 2020 , an increase of$143.6 million or 28% fromDecember 31, 2019 . The increase in construction loans stemmed from various disbursements of project loans during the nine months endedSeptember 30, 2020 . Residential real estate loans are generally secured by 1-4 unit residential properties and are underwritten using traditional underwriting systems to assess the credit risks and financial capacity and repayment ability of the consumer. Decisions are primarily based on LTV ratios, debt-to-income ("DTI") ratios, liquidity and credit scores. LTV ratios generally do not exceed 80%, although higher levels are permitted with mortgage insurance. We offer fixed rate mortgage products and variable rate mortgage products with interest rates that are subject to change every year after the first, third, fifth or tenth year, depending on the product and are based on LIBOR. Variable rate residential mortgage loans are underwritten at fully-indexed interest rates. We generally do not offer interest-only, payment-option facilities, Alt-A loans or any product with negative amortization. Residential real estate loans were$4.5 billion as ofSeptember 30, 2020 , a decrease of$128.3 million or 3% 75
Table of Contents
from
Consumer loans consist primarily of open- and closed-end direct and indirect credit facilities for personal, automobile and household purchases as well as credit card loans. We seek to maintain reasonable levels of risk in consumer lending by following prudent underwriting guidelines, which include an evaluation of personal credit history, cash flow and collateral values based on existing market conditions. Consumer loans were$1.4 billion as ofSeptember 30, 2020 , a decrease of$194.6 million or 12% fromDecember 31, 2019 . The decrease in consumer loans was primarily due to decreases in credit card balances and indirect automobile loans. Lease financing consists of commercial single investor leases and leveraged leases. Underwriting of new lease transactions is based on our lending policy, including but not limited to an analysis of customer cash flows and secondary sources of repayment, including the value of leased equipment, the guarantors' cash flows and/or other credit enhancements. No new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off. Lease financing was$246.0 million as ofSeptember 30, 2020 , an increase of$43.5 million or 22% fromDecember 31, 2019 . The increase in lease financing was due to portfolio growth in our commercial single investor leases. See "Note 3. Loans and Leases" and "Note 4. Allowance for Credit Losses" contained in our unaudited interim consolidated financial statements and the discussion in "Analysis of Financial Condition - Allowance for Credit Losses" of this MD&A for more information on our loan and lease portfolio. The Company's loan and lease portfolio includes adjustable-rate loans, primarily tied to Prime and LIBOR, hybrid-rate loans, for which the initial rate is fixed for a period from one year to as much as ten years, and fixed rate loans, for which the interest rate does not change through the life of the loan. Table 16 presents the recorded investment in our loan and lease portfolio as ofSeptember 30, 2020 by rate type: Loans and Leases by Rate Type Table 16 September 30, 2020 Adjustable Rate Hybrid Fixed
(dollars in thousands) Prime LIBOR
Total Rate Rate Total Commercial and industrial
$ 202,729 $ 1,580,855 $ -$ 67,019
3,068,609 107,822 284,654 3,461,085 Construction 35,091 504,753 32 31,533 571,409 981 90,481 662,871
Residential:
Residential mortgage 18,672 171,253 92,095 58,191
340,211 376,847 2,951,993 3,669,051 Home equity line 352,317 - 10,256 - 362,573 502,172 44 864,789 Total residential 370,989 171,253 102,351 58,191 702,784 879,019 2,952,037 4,533,840 Consumer 295,312 16,262 1,429 132 313,135 1,491 1,111,308 1,425,934 Lease financing - - - - - - 245,977 245,977
Total loans and leases
% by rate type at September 30, 2020 7 % 33 % 1 % 8 % 49 % 7 % 44 % 100 % 76 Table of Contents
Tables 17 and 18 present the geographic distribution of our loan and lease
portfolio as of
Geographic Distribution of Loan and Lease Portfolio Table 17
U.S. Guam & Foreign & (dollars in thousands) Hawaii Mainland(1) Saipan Other Total Commercial and industrial$ 1,850,652 $ 1,067,337 $ 205,193 $ 47,080 $ 3,170,262 Commercial real estate 2,246,115 814,164 400,588 218 3,461,085 Construction 303,217 353,296 6,358 - 662,871 Residential: Residential mortgage 3,548,042 2,417 118,592 - 3,669,051 Home equity line 833,609 161 31,019 - 864,789 Total residential 4,381,651 2,578 149,611 - 4,533,840 Consumer 1,056,122 19,373 348,805 1,634 1,425,934 Lease financing 85,745 145,250 14,982 - 245,977 Total Loans and Leases$ 9,923,502 $
2,401,998
73% 18% 8% 1% 100%
(1) For secured loans and leases, classification as
on where the collateral is located. For unsecured loans and leases, classification asU.S. Mainland is made based on the location where the majority of the borrower's business operations are conducted.
Geographic Distribution of Loan and Lease Portfolio Table 18
U.S. Guam & Foreign & (dollars in thousands) Hawaii Mainland(1) Saipan Other Total Commercial and industrial$ 1,270,997 $ 1,285,340 $ 140,929 $ 45,976 $ 2,743,242 Commercial real estate 2,289,626 768,314 405,720 293 3,463,953 Construction 261,089 253,577 4,575 - 519,241 Residential: Residential mortgage 3,642,251 2,708 123,977 - 3,768,936 Home equity line 861,079 78 32,082 - 893,239 Total residential 4,503,330 2,786 156,059 - 4,662,175 Consumer 1,202,762 22,521 393,045 2,228 1,620,556 Lease financing 85,842 110,630 6,011 - 202,483 Total Loans and Leases$ 9,613,646 $
2,443,168
73% 18% 8% 1% 100%
(1) For secured loans and leases, classification as
on where the collateral is located. For unsecured loans and leases, classification asU.S. Mainland is made based on the location where the majority of the borrower's business operations are conducted. Our lending activities are concentrated primarily inHawaii . However, we also have lending activities on theU.S. mainland,Guam and Saipan. Our commercial lending activities on theU.S. mainland include automobile dealer flooring activities inCalifornia , participation in the Shared National Credits Program and selective commercial real estate projects based on existing customer relationships. Our lease financing portfolio includes commercial leveraged and single investor lease financing activities both inHawaii and on theU.S. mainland. However, no new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off. Our consumer lending activities are concentrated primarily inHawaii and, to a smaller extent, inGuam and
Saipan. 77 Table of Contents
Table 19 presents certain contractual loan maturity categories and sensitivities
of those loans to changes in interest rates as of
Maturities for Selected Loan Categories(1) Table 19 September 30, 2020 Due in One Due After One Due After (dollars in thousands) Year or Less to Five Years Five Years Total Commercial and industrial$ 902,911 $ 2,029,418 $ 237,933 $ 3,170,262 Construction 302,925 287,762 72,184 662,871 Total Selected Loans$ 1,205,836 $ 2,317,180 $ 310,117 $ 3,833,133 Total of loans with: Adjustable interest rates$ 1,116,965 $ 1,087,884 $ 217,163 $ 2,422,012 Hybrid interest rates 618 24,627 7,719 32,964 Fixed interest rates 88,253 1,204,669 85,235 1,378,157 Total Selected Loans$ 1,205,836 $
2,317,180
(1) Based on contractual maturities.
Credit Quality
We perform an internal loan review and grading or scoring procedures on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of our lending policies and procedures. The objective of the loan review and grading or scoring procedures is to identify, in a timely manner, existing or emerging credit quality issues so that appropriate steps can be initiated to avoid or minimize future losses. For purposes of managing credit risk and estimating the ACL, management has identified three portfolio segments (commercial, residential and consumer) that we use to develop our systematic methodology to determine the ACL. The categorization of loans for the evaluation of credit risk is specific to our credit risk evaluation process and these loan categories are not necessarily the same as the loan categories used for other evaluations of our loan portfolio. See "Note 4. Allowance for Credit Losses" contained in our unaudited interim consolidated financial statements for more information about our approach to estimating the ACL. 78 Table of Contents The following tables and discussion address non-performing assets, loans and leases that are 90 days past due but are still accruing interest, impaired
loans and loans modified in a TDR.
Non-Performing Assets and Loans and Leases Past Due 90 Days or More and Still Accruing Interest
Table 20 presents information on our non-performing assets and accruing loans
and leases past due 90 days or more as of
Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More Table 20 September 30, December 31, (dollars in thousands) 2020 2019 Non-Performing Assets Non-Accrual Loans and Leases Commercial Loans: Commercial and industrial $ 725 $ 32 Commercial real estate 7,067 30 Construction 2,043 - Total Commercial Loans 9,835 62 Residential Loans: Residential mortgage 7,798 5,406 Total Residential Loans 7,798 5,406 Total Non-Accrual Loans and Leases 17,633 5,468 Other Real Estate Owned ("OREO") - 319 Total Non-Performing Assets $
17,633 $ 5,787
Accruing Loans and Leases Past Due 90 Days or More Commercial Loans: Commercial and industrial $ 1,938 $ 1,429 Commercial real estate 1,307 1,013 Construction 100 2,367 Total Commercial Loans 3,345 4,809 Residential Loans: Residential mortgage - 74 Home equity line 4,503 2,995 Total Residential Loans 4,503 3,069 Consumer 2,897 4,272
Total Accruing Loans and Leases Past Due 90 Days or More $ 10,745
Restructured Loans on Accrual Status and Not Past Due 90 Days or More
$ 9,726$ 14,493 Total Loans and Leases $
13,499,969
Ratio of Non-Accrual Loans and Leases to Total Loans and Leases
0.13 % 0.04 %
Ratio of Non-Performing Assets to Total Loans and Leases and OREO
0.13 % 0.04 %
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and OREO
0.21 % 0.14 %
Table 21 presents the activity in Non-Performing Assets ("NPAs") for the nine
months ended
Non-Performing Assets Table 21 Nine Months Ended September 30, (dollars in thousands) 2020 Balance at beginning of period $ 5,787 Additions 51,146
Reductions
Payments (6,890) Return to accrual status (567) Sales of other real estate owned (766) Transfers to loans held for sale (14,566) Charge-offs/write-downs (16,511) Total Reductions (39,300) Balance at end of period $ 17,633 79 Table of Contents The level of NPAs represents an indicator of the potential for future credit losses. NPAs consist of non-accrual loans and leases and other real estate owned. Changes in the level of non-accrual loans and leases typically represent increases for loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, paid down, sold, transferred to held for sale classification, transferred to other real estate owned or are no longer classified as non-accrual because they have returned to accrual status as a result of continued performance and an improvement in the borrower's financial condition and loan repayment capabilities. Total NPAs were$17.6 million as ofSeptember 30, 2020 , an increase of$11.8 million fromDecember 31, 2019 . The ratio of our NPAs to total loans and leases and other real estate owned was 0.13% as ofSeptember 30, 2020 , an increase of 9 basis points fromDecember 31, 2019 . The increase in total NPAs was primarily due to a$7.0 million increase in commercial real estate non-accrual loans, a$2.4 million increase in residential mortgage non-accrual loans and a$2.0 million increase in construction non-accrual loans. As ofSeptember 30, 2020 , commercial real estate non-accrual loans were$7.1 million , an increase of$7.0 million fromDecember 31, 2019 . This increase was primarily due to additions of$15.9 million in commercial real estate loans, partially offset by transfers to loans held for sale of$5.3 million and$2.7 million in charge-offs. The additions in commercial real estate non-accruals loans during the year was primarily due to the impact of COVID-19 and the shut-down of the tourism industry inHawaii . As ofSeptember 30, 2020 , commercial and industrial non-accrual loans were$0.7 million , an increase of$0.7 million fromDecember 31, 2019 . This increase was primarily due to additions in commercial and industrial loans totaling$28.6 million , partially offset by transfers to loans held for sale of$9.3 million ,$13.4 million in charge-offs and$5.3 million in payments. The additions in commercial and industrial non-accruals loans during the year was primarily due to the impact of COVID-19 and the shut-down of the tourism industry inHawaii .
As of
As of
Other real estate owned represents property acquired as the result of borrower defaults on loans. Other real estate owned is recorded at fair value, less estimated selling costs, at the time of foreclosure. On an ongoing basis, properties are appraised as required by market conditions and applicable regulations. As ofSeptember 30, 2020 , there were no other real estate owned. As ofDecember 31, 2019 , other real estate owned was$0.3 million which was comprised of two residential real estate properties. Loans and Leases Past Due 90 Days or More and Still Accruing Interest. Loans and leases in this category are 90 days or more past due, as to principal or interest, and are still accruing interest because they are well secured and
in the process of collection.
Loans and leases past due 90 days or more and still accruing interest were
million as ofSeptember 30, 2020 , a decrease of$1.4 million or 12% as compared toDecember 31, 2019 . Construction and consumer loans that were past due 90 days or more and still accruing interest decreased by$2.3 million and$1.4 million , respectively, during the nine months endedSeptember 30, 2020 . This was partially offset by increases of$1.5 million and$0.5 million in home equity lines and commercial and industrial loans, respectively, that were past due 90 days or more and still accruing interest during the nine months endedSeptember 30, 2020 . Impaired Loans. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. For a loan that has been modified in a TDR, the contractual terms of the loan agreement refers to the contractual terms specified by the original loan agreement, not the contractual terms specified by the modified loan agreement. 80 Table of Contents Impaired loans were$28.2 million and$20.6 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. These impaired loans had a related ACL of$2.2 million and$0.2 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. The increase in impaired loans during the nine months endedSeptember 30, 2020 was primarily due to increases in commercial real estate and construction loans of$7.0 million and$1.8 million , respectively, partially offset by decreases in commercial and industrial loans and residential mortgage loans of$0.8 million and$0.5 million , respectively. The decrease in the impaired loans balance includes charge-offs and paydowns. For the three months endedSeptember 30, 2020 and 2019, we recorded charge-offs of$0.1 million and$0.5 million , respectively, related to our total impaired loans. For the nine months endedSeptember 30, 2020 and 2019, we recorded charge-offs of$16.5 million and$0.5 million , respectively, related to our total impaired loans. Our impaired loans are considered in management's assessment of the overall adequacy of the ACL. If interest due on the balances of all non-accrual loans as ofSeptember 30, 2020 had been accrued under the original terms, approximately$0.3 million and$0.9 million in additional interest income would have been recorded during the three and nine months endedSeptember 30, 2020 , respectively, compared to nil and$0.1 million in additional interest income that would have been recorded for the same periods in 2019. Actual interest income recorded on these loans was$0.1 million and$0.2 million , respectively, for the three and nine months endedSeptember 30, 2020 , compared to$0.4 million and$1.3 million , respectively, for the same periods in 2019.
COVID-19 Financial Hardship Relief Programs
Certain borrowers have been unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, we have been offering various relief programs to assist customerswho are experiencing financial hardship due to COVID-19. For example, for certain residential mortgage and commercial loans, various relief options were available on a case-by-case basis, including payment deferrals for up to six months. For certain consumer loans, loan assistance was being offered in the form of payment deferrals for up to three months, which extended the term of the loan by the number of months deferred, and interest continued to accrue on the principal balance. The short-term modifications for payment deferrals, extensions of repayment terms, or delays in payment described above that are insignificant and made on a good faith basis in response to borrowers impacted by COVID-19who were current prior to any relief are not required to be accounted for and disclosed as TDRs under GAAP. Please see "Note 4. Allowance for Credit Losses" in the notes to our unaudited interim consolidated financial statements for further discussion on short-term modifications. 81 Table of Contents
Table 22 presents information on our loans and leases that received payment
deferrals under our COVID-19 financial hardship relief programs as of
Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs
Table 22 September 30, 2020 Number of Loans Amortized (dollars in thousands) and Leases Cost Basis Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs Commercial and industrial 1,206$ 809,778 Commercial real estate 429 1,196,376 Construction 39 62,383 Lease financing 58 9,927 Residential mortgage 1,585 684,281 Consumer 17,091 259,350
Total Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs
20,408$ 3,022,095 Total Loans and Leases
Ratio of Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs to Total Loans and Leases
22.4 % In addition to the relief programs described above, we have been also participating in the PPP offered by the SBA. The PPP is intended to help small businesses impacted by the COVID-19 pandemic by providing "fully forgivable" loans for up to$10 million to cover up to 24 weeks of payroll expenses, including employee benefits, and can also be used to make mortgage interest, rent and utility payments. PPP loans have a fixed interest rate of one percent per annum and a maturity date of up to five years, with the ability to prepay the loan in full without penalty. The first payment is deferred for 10 months or until compensation is received for forgiven amounts, and interest will continue to accrue during the initial deferment period. The borrower may apply with the Bank for loan forgiveness of the amount due on the loan in an amount equal to payroll, employee benefits, mortgage interest, rent and utility costs incurred during the 24-week period, subject to limitations, in accordance with the PPP and CARES Act. Because the purpose of the PPP is to help small businesses keep their workers employed and paid, if the business spends less than 60% of loan proceeds on payroll costs, uses the loan proceeds for non-payroll costs that are not related to mortgage interest, rent or utility payments, or significantly reduces its employee count or compensation levels without qualifying for other exceptions, a portion of the loan will not be forgiven, and the business will be required to repay that portion of the loan to the Bank over the remaining term of the loan. 82 Table of Contents
Table 23 presents information on our PPP loans outstanding as ofSeptember 30, 2020 to borrowers operating in industries we consider to be the most impacted by the COVID-19 pandemic ("high impact industries") and all other industries: PPP Loans Outstanding to Borrowers by Industry
Table 23 September 30, 2020 Number Amortized (dollars in thousands) of Loans Cost Basis PPP Loans Outstanding to Borrowers byIndustry High Impact Industries : Food service 599$ 111,971 Automobile dealers 77 64,228 Retail 517 60,101 Hospitality/Hotel 95 57,045 Transportation 166 35,774
Total PPP Loans Outstanding to Borrowers Operating in
1,454
329,119
All other industries (1) 4,561
591,049
Total PPP Loans Outstanding (2) 6,015 $
920,168
Total Loans and Leases $
13,499,969
Ratio of PPP Loans Outstanding to Borrowers Operating in
2.4 % Ratio of PPP Loans Outstanding to Total Loans and Leases
6.8 %
(1) "All other industries" represent borrowers that received PPP loans that did
not operate in the five high impact industries listed above, which is primarily comprised of the construction, health care, and professional services industries.
(2) Outstanding loan balances are reported net of deferred loan costs and fees of
$2.0 million and$22.2 million , respectively, atSeptember 30, 2020 .
Loans Modified in a Troubled Debt Restructuring
Table 24 presents information on loans whose terms have been modified in a TDR
as of
Loans Modified in a Troubled Debt Restructuring
Table 24 September 30, December 31, (dollars in thousands) 2020 2019 Commercial and industrial $ 3,470 $ 4,919 Commercial real estate 665 692 Total commercial 4,135 5,611 Residential mortgage 6,764 10,487 Total$ 10,899 $ 16,098 Loans modified in a TDR were$10.9 million as ofSeptember 30, 2020 , a decrease of$5.2 million or 32% fromDecember 31, 2019 . This decrease was primarily due to decreases in residential mortgage loans of$3.7 million and commercial and industrial loans of$1.4 million . As ofSeptember 30, 2020 ,$9.7 million or 89% of our loans modified in a TDR were performing in accordance with their modified contractual terms and were on accrual status. Generally, loans modified in a TDR are returned to accrual status after the borrower has demonstrated performance under the modified terms by making six consecutive timely payments. See "Note 4. Allowance for Credit Losses" contained in our unaudited interim consolidated financial statements for more information and a description of the modification programs that we currently offer to our customers. As noted above, we have begun to provide our borrowers with opportunities to defer payments, or portions thereof. In the absence of intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). 83 Table of Contents
Allowance for Credit Losses for Loans and Leases & Reserve for Unfunded Commitments
We adopted the provisions of Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments onJanuary 1, 2020 . This guidance changes the accounting for credit losses from an "incurred loss" model, which estimates a loss allowance based on current known and inherent losses within a loan portfolio to an "expected loss" model, which estimates a loss based on losses expected to be recorded over the life of the loan portfolio. EffectiveJanuary 1, 2020 , we recorded a pre-tax cumulative effect adjustment to increase the ACL by$0.8 million and to increase the reserve for unfunded commitments by$16.3 million . The Company's ACL under CECL is significantly more dependent on the quantitative model and less on the qualitative assessment, compared to the previous incurred loss model. The increase in the ACL was primarily related to our indirect auto, commercial real estate and consumer loan products. This was partially offset by the decrease in the ACL related to our commercial and industrial, home equity lines and residential real estate loan products. These directional changes were predominantly due to differences between the loss emergence periods previously used under the incurred loss methodology and the remaining life of the loan as required under CECL. The large increase to our reserve for unfunded commitments was primarily due to an increase in utilization rates estimated using our CECL methodology.
Table 25 presents an analysis of our ACL for the periods indicated:
Allowance for Credit Losses Table 25 Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2020 2019 2020 2019 Balance at Beginning of Period $ 192,120 $
138,535 $ 130,530 $ 141,718 Adjustment to Adopt ASC Topic 326
- - 770 - After Adoption of ASC Topic 326 192,120 138,535 131,300 141,718 Loans and Leases Charged-Off Commercial Loans: Commercial and industrial (598) (514) (14,773) (2,514) Commercial real estate - - (2,723) - Construction - - (379) - Lease financing - - - (24) Total Commercial Loans (598) (514) (17,875) (2,538) Residential Loans: Residential mortgage - (7) (14) (7) Home equity line - - (8) - Total Residential Loans - (7) (22) (7) Consumer (4,238) (8,015) (21,742) (24,118) Total Loans and Leases Charged-Off (4,836) (8,536) (39,639) (26,663) Recoveries on Loans and Leases Previously Charged-Off Commercial Loans: Commercial and industrial 1,699
241 2,019 303 Commercial real estate - 30 - 93 Construction 30 - 170 - Total Commercial Loans 1,729 271 2,189 396 Residential Loans: Residential mortgage 27 368 179 704 Home equity line 16 57 146 156 Total Residential Loans 43 425 325 860 Consumer 3,148 2,269 7,687 7,103 Total Recoveries on Loans and Leases Previously Charged-Off 4,920 2,965 10,201 8,359 Net Loans and Leases Recovered (Charged-Off) 84 (5,571) (29,438) (18,304) Provision for Credit Losses - Loans and Leases 3,672 - 94,014 9,550 Balance at End of Period $ 195,876 $
132,964 $ 195,876 $ 132,964 Average Loans and Leases Outstanding
$ 13,559,367 $
13,032,349
- % 0.17 % 0.29 % 0.19 % Ratio of Allowance for Credit Losses for Loans and Leases to Loans and Leases Outstanding 1.45 % 1.04 % 1.45 % 1.04 %
(1) Annualized for the three and nine months ended
84 Table of Contents Tables 26 and 27 present the allocation of the ACL by loan and lease category, in both dollars and as a percentage of total loans and leases outstanding as ofSeptember 30, 2020 andDecember 31, 2019 : Allocation of the Allowance for Credit Losses by Loan and Lease Category Table 26 September 30, December 31, (dollars in thousands) 2020 2019 Commercial and industrial $ 21,271$ 28,975 Commercial real estate 51,733 22,325 Construction 4,934 4,844 Lease financing 4,051 424 Total commercial 81,989 56,568 Residential mortgage 42,217 29,303 Home equity line 7,601 9,876 Total residential 49,818 39,179 Consumer 64,069 34,644 Unallocated - 139
Total Allowance for Credit Losses for Loans and Leases
Allocation of the Allowance for Credit Losses by Loan and Lease Category
Table 27 September 30, December 31, 2020 2019 Allocated Loan Allocated Loan ACL as category as ACL as category as (as a percentage of total loans % of loan or % of total % of loan or % of total and leases outstanding) lease category loans and leases lease category loans and leases Commercial and industrial 0.67 % 23.48 % 1.06 % 20.76 % Commercial real estate 1.49 25.64 0.64 26.22 Construction 0.74 4.91 0.93 3.93 Lease financing 1.65 1.82 0.21 1.53 Total commercial 1.09 55.85 0.82 52.44 Residential mortgage 1.15 27.18 0.78 28.53 Home equity line 0.88 6.41 1.11 6.76 Total residential 1.10 33.59 0.84 35.29 Consumer 4.49 10.56 2.14 12.27 Total 1.45 % 100.00 % 0.99 % 100.00 % As ofSeptember 30, 2020 , the ACL was$195.9 million or 1.45% of total loans and leases outstanding, compared with an ACL of$130.5 million or 0.99% of total loans and leases outstanding as ofDecember 31, 2019 . The level of the ACL was commensurate with the adverse impacts that COVID-19 is having on theHawaii
and global economy. Net recoveries of loans and leases were$0.1 million for the three months endedSeptember 30, 2020 compared to net charge-offs of$5.6 million or 0.17% of total average loans and leases, on an annualized basis, for the three months endedSeptember 30, 2019 . Net recoveries in our commercial lending portfolio were$1.1 million for the three months endedSeptember 30, 2020 compared to net charge-offs of$0.2 million for the three months endedSeptember 30, 2019 . Net recoveries in our residential lending portfolio were nil and$0.4 million for the three months endedSeptember 30, 2020 and 2019, respectively. Net charge-offs in our consumer lending portfolio were$1.1 million and$5.7 million for the three months endedSeptember 30, 2020 and 2019, respectively. Net charge-offs in our consumer portfolio segment include those related to credit cards, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans. Net charge-offs of loans and leases were$29.4 million , or 0.29% of total average loans and leases on an annualized basis, for the nine months endedSeptember 30, 2020 compared to$18.3 million or 0.19% of total average loans and leases, on an annualized basis, for the nine months endedSeptember 30, 2019 . Net charge-offs in our commercial lending portfolio were$15.7 million and$2.1 million for the three months endedSeptember 30, 2020 and 2019, respectively. The increase in net charge-offs in our commercial lending portfolio was primarily due to$16.0 million in charge-offs related to several loans that have been adversely impacted by the shut-down of the tourism industry inHawaii . Net recoveries in our residential lending portfolio were$0.3 million and$0.9 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Our net 85 Table of Contents recovery position in this portfolio segment is largely attributable to rising real estate prices inHawaii . Net charge-offs in our consumer lending portfolio were$14.1 million and$17.0 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Net charge-offs in our consumer portfolio segment include those related to credit card, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans. The increase in the ACL during the third quarter of 2020 was primarily due to the adverse economic impact that COVID-19 is having and is expected to continue to have on the global, national and local economies. Business closures and the ripple effect it has had and will continue to have on unemployment filings is expected to impact the ability of our borrowers to continue to remain current on their loans and leases. As noted earlier, a significant number of our customers (primarily individuals and small businesses) have taken advantage of payment deferral programs in assisting them while they may be temporarily unemployed or while their businesses have closed. We continue to monitor the impact of COVID-19 on our tourism industry and the re-opening of theHawaii economy under new guidelines. Once these measures are relaxed, we expect that local consumption of goods and services will begin to resume over an extended period of time. Additionally, effectiveOctober 15, 2020 , while theState of Hawaii has begun to allow passengers from theU.S. mainland with an approved negative COVID-19 test within 72 hours prior to arrival in theState of Hawaii to bypass the state's mandatory 14-day self-quarantine requirement, the timing and extent of the return of air travel and the recovery of theHawaii tourism industry is highly uncertain and is dependent upon the number of cases declining around
the globe. As ofSeptember 30, 2020 , the higher allocation of our ACL to our commercial and consumer portfolio segments and the lower allocation to our residential portfolio segment (which is secured by real estate), is primarily due to expected credit losses related to COVID-19 and the impact that it will have on theHawaii economy, local businesses and our customers. See "Note 4. Allowance for Credit Losses" contained in our unaudited interim consolidated financial statements for more information on the ACL.Goodwill
Goodwill was$995.5 million as of bothSeptember 30, 2020 andDecember 31, 2019 . Our goodwill originated from the acquisition of the Company byBNP Paribas in December of 2001.Goodwill generated in that acquisition was recorded on the balance sheet of the Bank as a result of push down accounting treatment, and remains on our consolidated balance sheets. The Company's policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of a reporting unit exceeds its fair value. The continued adverse effect of the COVID-19 pandemic prompted the Company to perform an interim assessment of its goodwill for impairment during the third quarter of 2020. The Company performed an assessment of the criteria included in Accounting Standards Codification Topic 350, Intangibles -Goodwill and Other, and based on such assessment, the Company concluded that there was no impairment in our goodwill for the three and nine months endedSeptember 30, 2020 . Future events, including the ongoing impacts of the COVID-19 pandemic, that could cause a significant decline in our expected future cash flows or a significant adverse change in our business or the business climate may necessitate taking charges in future reporting periods related to the impairment of our goodwill. Other Assets
Other assets were
Deposits
Deposits are the primary funding source for the Bank and are acquired from a broad base of local markets, including both individual and corporate customers. We obtain funds from depositors by offering a range of deposit types, including demand, savings, money market and time. 86 Table of Contents Table 28 presents the composition of our deposits as ofSeptember 30, 2020 andDecember 31, 2019 : Deposits Table 28 September 30, December 31, (dollars in thousands) 2020 2019 Demand$ 6,908,270 $ 5,880,072 Savings 5,994,687 4,998,933 Money Market 3,379,985 3,055,832 Time 2,614,820 2,510,157 Total Deposits(1)$ 18,897,762 $ 16,444,994
(1) Public deposits were
$745.7 million compared toDecember 31, 2019 .
Total deposits were$18.9 billion as ofSeptember 30, 2020 , an increase of$2.5 billion or 15% fromDecember 31, 2019 . The increase in deposit balances stemmed primarily from a$1.0 billion increase in demand deposit balances, a$545.4 million increase in public savings deposit balances and a$450.4 million increase in non-public savings deposit balances. We increased our liquidity position in anticipation of a surge in funding needs, primarily due to our participation in the PPP.
Short-term and Long-term Borrowings
As ofSeptember 30, 2020 there were no short-term borrowings as the remaining short-term FHLB fixed-rate advance matured inJuly 2020 . As ofDecember 31, 2019 short-term borrowings were$400.0 million with a weighted average interest
rate of 2.84%.
Long-term borrowings were$200.0 million as of bothSeptember 30, 2020 andDecember 31, 2019 . The Company's long-term borrowings included$200.0 million in FHLB fixed-rate advances with a weighted average interest rate of 2.73% and maturity dates ranging from 2023 to 2024. Long-term borrowings mature in excess of one year from the unaudited interim consolidated balance sheet date. As ofSeptember 30, 2020 andDecember 31, 2019 , the available remaining borrowing capacity with the FHLB was$2.0 billion and$1.7 billion , respectively. The FHLB fixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as ofSeptember 30, 2020
andDecember 31, 2019 .
Pension and Postretirement Plan Obligations
We have a noncontributory qualified defined benefit pension plan, an unfunded supplemental executive retirement plan, a directors' retirement plan (a non-qualified pension plan for eligible directors) and a postretirement benefit plan providing life insurance and healthcare benefits that we offer to our directors and employees, as applicable. The noncontributory qualified defined benefit pension plan, the unfunded supplemental executive retirement plan and the directors' retirement plan are all frozen to new participants. OnMarch 11, 2019 , the Company's board of directors approved an amendment to the SERP to freeze the SERP. As a result of such amendment, effectiveJuly 1, 2019 , there are no new accruals of benefits, including service accruals. To calculate annual pension costs, we use the following key variables: (1) size of the employee population, length of service and estimated compensation increases; (2) actuarial assumptions and estimates; (3) expected long-term rate of return on plan assets; and (4) discount rate. Pension and postretirement benefit plan obligations, net of pension plan assets, were$122.2 million as ofSeptember 30, 2020 , a nominal increase fromDecember 31, 2019 . This increase was primarily due to net periodic benefit costs for the nine months endedSeptember 30, 2020 of$6.5 million , offset by payments of$6.3 million .
See "Note 16. Noninterest Income and Noninterest Expense" contained in our unaudited interim consolidated financial statements for more information on our pension and postretirement benefit plans.
87 Table of Contents Foreign Activities Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated in dollars or other non-local currency. As ofSeptember 30, 2020 , there were no aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets. As ofDecember 31, 2019 , aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets were approximately$174.7 million toJapan and$162.1 million toCanada . There were no cross-border outstandings in excess of 1% of our total consolidated assets as of bothSeptember 30, 2020 andDecember 31, 2019 . Capital
The bank regulators currently use a combination of risk-based ratios and a leverage ratio to evaluate capital adequacy. The Company and the Bank are subject to the federal bank regulators' final rules implementing Basel III and various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Capital Rules".) The Capital Rules, among other things impose a capital measure called "Common Equity Tier 1" ("CET1"), to which most deductions/adjustments to regulatory capital must be made. In addition, the Capital Rules specify that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments meeting certain specified requirements.
Under the Capital Rules, the minimum capital ratios are as follows:
? 4.5% CET1 capital to risk-weighted assets,
? 6.0% Tier 1 capital (that is, CET1 capital plus Additional Tier 1 capital) to
risk-weighted assets,
? 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to
risk-weighted assets, and
? 4.0% Tier 1 capital to average quarterly assets.
The Capital Rules also require a 2.5% capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk weighted asset ratios, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, and (iii) 10.5% total capital to risk-weighted assets. As ofSeptember 30, 2020 , the Company's capital levels remained characterized as "well capitalized" under the Capital Rules. Our regulatory capital ratios, calculated in accordance with the Capital Rules, are presented in Table 29 below. There have been no conditions or events sinceSeptember 30, 2020 that management believes have changed either the Company's or the Bank's capital
classifications. Regulatory Capital Table 29 September 30, December 31, (dollars in thousands) 2020 2019 Stockholders' Equity$ 2,733,934 $ 2,640,258 Less: Goodwill 995,492 995,492
Accumulated other comprehensive income (loss), net 51,254
(31,749)
Common Equity Tier 1 Capital and Tier 1 Capital$ 1,687,188 $ 1,676,515 Add: Qualifying allowance for credit losses and reserve for unfunded commitments 173,191 131,130 Total Capital$ 1,860,379 $ 1,807,645 Risk-Weighted Assets$ 13,808,018 $ 14,110,799 Key Regulatory Capital Ratios
Common Equity Tier 1 Capital Ratio 12.22
% 11.88 % Tier 1 Capital Ratio 12.22 % 11.88 % Total Capital Ratio 13.47 % 12.81 % Tier 1 Leverage Ratio 7.91 % 8.79 % 88 Table of Contents
The tier 1 leverage ratio decreased 88 basis points from 8.79% atDecember 31, 2019 to 7.91% atSeptember 30, 2020 . This decrease primarily stemmed from increases in the average balances of investment securities, loans and leases and interest bearing deposits. Total stockholders' equity was$2.7 billion as ofSeptember 30, 2020 , an increase of$93.7 million or 4% fromDecember 31, 2019 . The increase in stockholders' equity was primarily due to earnings for the period of$124.0 million and a net unrealized gain in the fair value of our investment securities of$83.1 million . This was partially offset by dividends declared and paid to the Company's stockholders of$101.3 million and the cumulative effect adjustment of a change in an accounting principle of$12.5 million during the nine months endedSeptember 30, 2020 .
In
Off-Balance Sheet Arrangements and Guarantees
Off-Balance Sheet Arrangements
We hold interests in several unconsolidated variable interest entities ("VIEs"). These unconsolidated VIEs are primarily low income housing tax credit investments in partnerships and limited liability companies. Variable interests are defined as contractual ownership or other interest in an entity that change with fluctuations in an entity's net asset value. The primary beneficiary consolidates the VIE. Based on our analysis, we have determined that the Company is not the primary beneficiary of these entities. As a result, we do not consolidate these VIEs. Guarantees We sell residential mortgage loans on the secondary market, primarily to Fannie Mae or Freddie Mac. The agreements under which we sell residential mortgage loans to Fannie Mae or Freddie Mac contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state and local laws and other matters. As of bothSeptember 30, 2020 andDecember 31, 2019 , the unpaid principal balance of our portfolio of residential mortgage loans sold was$2.3 billion . The agreements under which we sell residential mortgage loans require delivery of various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred if a loan review reveals that underwriting and documentation standards were potentially not met in the origination of those loans. Upon receipt of a repurchase request, we work with investors to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor to determine if a contractually required repurchase event has occurred. We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards. For the nine months endedSeptember 30, 2020 , there was one repurchase of a residential mortgage loan of$0.3 million and there was one pending repurchase of a residential mortgage loan of$0.5 million . In addition to servicing loans in our portfolio, substantially all of the loans we sell to investors are sold with servicing rights retained. We also service loans originated by other mortgage loan originators. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans, or loan modifications or short sales. Each agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by the Company in such capacity and provides protection against expenses and liabilities incurred by the Company when acting in compliance with the respective servicing agreements. However, if we commit a material breach of obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Company. Remedies could include repurchase of an affected
loan. For 89 Table of Contents the nine months endedSeptember 30, 2020 , we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as ofSeptember 30, 2020 .
Although to date repurchase requests related to representation and warranty provisions and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as ofSeptember 30, 2020 , management believes that this exposure is not material due to the historical level of repurchase requests and loss trends and thus has not established a liability for losses related to mortgage loan repurchases. As ofSeptember 30, 2020 , 97% of our residential mortgage loans serviced for investors were current. We maintain ongoing communications with investors and continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in loans
sold to investors. Contractual Obligations
Our contractual obligations have not changed materially since previously
reported as of
Future Application of Accounting Pronouncements
For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as ofSeptember 30, 2020 , see "Note 1. Organization and Basis of Presentation - Recent Accounting Pronouncements" to the unaudited interim consolidated financial statements for more information.
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